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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
KB Kee is the Managing Editor of the Moat Report Asia (www.moatreport.com), a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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