June 12, 2014 / 10:09 AM / 4 years ago

Lululemon sees tough second-quarter, shares tumble

TORONTO, (Reuters) - Lululemon Athletica Inc (LULU.O) offered little sign on Thursday that it was pulling out of an extended slump, cutting financial forecasts and warning that second-quarter sales at its once-trendy yogawear shops were off to a weak start.

Yogawear retailer Lululemon Athletica Inc's logo is pictured at its store in downtown Vancouver June 11, 2014. REUTERS/Ben Nelms

Its shares dropped more than 15 percent after it said purchases were dropping even as customer traffic was picking up. During a conference call, Chief Executive Laurent Potdevin blamed the decline in part on a “suboptimal” product assortment.

With Thursday’s retreat, the shares have dropped more than 40 percent since the company announced an embarrassing recall of overly sheer yoga pants in March 2013. The incident shook up customers and investors in the company just as lower-priced competitors started to crowd into the yogawear market, a business that Lululemon virtually invented.

“We have a core product assortment that has not been evolved as quickly as it should have been,” Tara Poseley, Lululemon’s new chief product officer, said on the call. She said Lululemon did not offer enough seasonal products, as opposed to all-season “core” products, in the first quarter.

The results came a day after Lululemon’s founder and largest shareholder, Dennis “Chip” Wilson, announced he had voted against the election of the company’s new chairman as well as another board member. Wilson praised management but said the board is too focused on short-term growth.

For the second quarter, which started on May 5, Lululemon expects no comparable sales growth at all.

Comparable sales edged up 1 percent in the first quarter, but the gain reflected an increase in online business. In established stores, sales dropped 4 percent.

Potdevin admitted to investors earlier this year that Lululemon was “not the only game in town anymore.” Rivals such as Gap Inc (GPS.N), Under Armour (UA.N), VF Corp (VFC.N) and even department stores are pushing fashionable workout gear.

Even as first-quarter earnings came in slightly ahead of expectations, Lululemon’s latest forecasts reinforced the impression that the retailer is struggling to regain its stride.

“The second quarter guidance is for a real deceleration from the already anemic first quarter,” said Cowen and Co analyst Faye Landes.

In another blow, Lululemon said veteran Chief Financial Officer John Currie would retire by the end of the fiscal year. His departure comes about a year after Chief Executive Christine Day announced her own exit, a move that followed an extended slowdown in sales at a company once renowned for double-digit growth.


The company now expects revenue for the year to be in the range of $1.77 billion to $1.80 billion, with adjusted earnings of between $1.71 and $1.76 per share. It had earlier forecast earnings of $1.80 to $1.90 per share on revenue of $1.77 billion to $1.82 billion.

Analysts, on average, had expected full-year earnings of $1.89 a share on revenue of $1.8 billion, according to Thomson Reuters I/B/E/S.

Vancouver-based Lululemon’s reputation for selling pricey but top-quality yoga and running clothes was badly tarnished by last year’s recall, which came after some customers noticed that their stretchy pants were partially transparent.

For more than a year, it has worked to smooth out quality and supply-chain issues, battle lawsuits, deal with departing executives and soothe customers after Wilson said in an interview that “some women’s bodies just actually don’t work” for Lulu’s pants.

The retailer had previously said it would not fully resolve its supply chain issues until 2015.

Excluding a one-time adjustment for planned repatriation of foreign earnings, the company said profit in the quarter was 34 cents a share. Analysts on average were expecting earnings of 32 cents a share.

On a net basis, profit in the fiscal first quarter ended May 4 fell to $19 million, or 13 cents per share, from $47.3 million or 32 cents per share a year earlier.

Revenue rose 11 percent to $384.6 million, while sales at established stores and online sales edged up 1 percent from a year earlier. The company had forecast little change. The small gain came thanks to online sales, which rose 25 percent while comparable sales at corporate stores fell 4 percent.

The company said it could buy back up to $450 million worth of common shares over two years.

Shares were down 15.5 percent at $37.43 on Thursday afternoon on the Nasdaq.

Additional reporting by Shubhankar Chakravorty in Bangalore; editing by Kirti Pandey, Sofina Mirza-Reid, Chizu Nomiyama and Matthew Lewis

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