Friday, December 13, 2013

Lululemon Athletica: If Life Gives You Lemonade…Spill It

Lululemon Athletica (LULU) earned itself a second chance with investors on Tuesday, when it announced that its controversial founder, Chip Wilson, was out as chairman and a new CEO was in. It might already have blown it.


The yoga apparel maker disappointed investors today when it said it would report far lower sales during the fourth quarter than investors had expected. Reuters reports:

For the current quarter, which includes the holiday shopping season, Lululemon forecast earnings between 78 and 80 cents a share, and revenue from $535 million to $540 million. Analysts had been expecting earnings of 84 cents a share on revenue of $571.8 million.

For fiscal 2013, which ends around February, the retailer now projects net revenue to be between $1.605 billion and $1.610 billion, down from an already lowered forecast of $1.625 billion to $1.635 billion. Diluted earnings per share are forecast to be between $1.94 and $1.96 for the year.

Color Canaccord Genuity’s Camilo Lyon and Patrick O’Brien perplexed. They write:

We are perplexed by the change in Q4 comp trend implied by the guidance as it would imply a significant, structural shift in the business that we do not believe has happened. Recall initial Q4 comp guidance was HSD and today's guidance is implying a 1300bp two-year deceleration from Q3. While the retail landscape is highly promotional, we do not believe LULU is suffering disproportionately to explain this magnitude of change in the guidance.

As Reuters notes, its also possible that Under Armour (UA), Nike (NKE), and Gap’s (GPS) Athleta brand could also be stealing some of Lululemon’s thunder. Sterne Agee’s Sam Poser and Ben Shamsian explain what Lululemon needs:

In order for LULU to flourish we contend that there must be a perfect balance between a great in store experience, an efficient supply chain, and great operations. If any of the aforementioned breakdown, especially the in store experience, the Lululemon brand will be in trouble, as guests will become unwilling to pay the historical premium prices for the company’s goods.

For investors seeking a bright side, there’s this from Buckingham Research Group’s John Zolidis:

…investors should keep in mind two things: 1) The stock is heavily shorted which will likely have its largest impact on trading today and 2) The new CEO's option grants price over a January-March 2014 timeframe which in some ways suggests he is incentivized to get the stock lower between now and then.

For Barron’s take, click here.

Lululemon has dropped 11% to $60.76 at 3:25 p.m., while Under Armour has dipped 0.3% to $84.19, Nike has fallen 0.3% to $76.37 and the Gap has gained 0.3% to $38.44.

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