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Can Lululemon Regain Its Harmony? Shares of the yoga-apparel retailer took a hard fall on troubling sales news. Time to buy?

Can Lululemon Regain Its Harmony?

Shares of the yoga-apparel retailer took a hard fall on troubling sales news. Time to buy?

JOHANNA BENNETT

June 12, 2014 2:55 p.m. ET

Investors hoping that yoga-apparel icon Lululemon Athletica can overcome last year’s public relations disasters and regain its former glory have once again been left flat on the mat.

Early Thursday, the retailer unveiled better-than-expected profit per share for the fiscal first-quarter ended May 4 of 34 cents as revenue rose 11% to $384.6 million. Lululemon (ticker: LULU ) had expected profit of 31 cents to 33 cents a share. It also announced plans to repurchase $450 million in stock.

But the good earnings news was overshadowed by lousy same-store sales and falling operating margins. The company slashed its full-year financial forecasts. It now expects to earn between $1.71 per share and $1.76 per share on revenue of $1.77 billion to $1.80 billion. It had previously forecast profit per share of $1.80 to $1.90 on revenue of $1.77 billion to $1.82 billion.

And for the second quarter, it expects to yield profit per share of 28 cents to 30 cents on $375 million to $380 million in revenue, missing estimates from analysts polled by Thomson Reuters of 36 cents a share.

Wall Street’s reaction was brutal. The shares fell 14.2% to $37.97 after earlier dropping more than 16% to a three-year low of $37.

Bullish sentiment persists among some analysts. But this is no time to dive into Lululemon. The company’s lowered outlook is a fresh sign that the once-flying retailer still struggles to return to strong growth in an increasingly crowded field. Another executive departure and a very public fight Wednesday between the board and founder Dennis “Chip” Wilson offer little reason to hope for a fast fix.

In short, Lululemon remains a downward facing dog.

“There is no reason to go long on Lululemon,” says Brian Sozzi, chief executive and chief equities strategist at Belus Capital Advisors. “Everything is going the wrong way.”

Lululemon developed a strong brand and a cult-like following for expensive yoga gear that helped fuel steep sales and profit growth and a high-flying stock price that peaked above $82 a share last year.

The company’s reputation was sullied by last year’s embarrassing recall of yoga pants. Since then, it has worked to fix quality and supply-chain problems, battled lawsuits and endured departing executives. It has also faced backlash after Wilson made some controversial comments suggesting that quality issues were in part the fault of overweight customers.

All this and rising competition from lower-priced rivals led Barrons.com to go cautious on the stock in December (see Barron’s Take, “Lululemon: Bottom-Fishers Beware,” Dec. 12, 2013), a call that hit the mark as the shares have since fallen more than 37%.

Chief Executive Laurent Potdevin calls 2014 a “transitional year.” Still, reinvigorating Lululemon may take longer than a year, and it remains a heavily shorted company with a short position of 24.98 million shares as of May 31.

Same-store sales rose a paltry 1% during the previous quarter, thanks to a 4% decline in sales at brick and mortar stores offset by a 25% surge in online sales. And the company revealed on today’s conference call that May’s performance has been disappointing, and the company’s second-quarter comparable sales have declined.

Operating profit margins fell to 18.2% from 19.1% last year.

Chief Financial Officer John Currie, who has been with the company since 2007, plans to retire by the end of the fiscal year, adding to the already significant management turnover.

Add to that, Lululemon remains an expensive stock, trading at 21.9 times fiscal 2015 earnings estimates – too much to pay for such a troubled company.

All in all, Lululemon is overshadowed by some bad karma.

 

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About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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