Lululemon stock sheds 15% on bleak sales slump

Lululemon Athletica Inc. shares fell more than 15 per cent Monday after the yoga fashion retailer said its fourth-quarter results would be lower than expected the latest bit of bad news for a company that could once do no wrong.

"We were on track to deliver on our sales and earnings guidance through the month of December; however, since the beginning of January, we have seen traffic and sales trends decelerate meaningfully," Lululemon's chief financial officer, John Currie, said in a statement Monday.

The Vancouver-based companysays it now expects its revenue and profit for the fourth quarter ending Feb. 2 will be significantly lower than its previous estimate before Christmas.

Lululemon's new revenue range is between $513 million US and $518 million US, about $22 million lower than the previous guidance. The company's new estimate for diluted earnings per share is between 71 and 73 cents per share, a reduction of seven cents.

"As we end 2013, we are starting to see the results of the significant investments we made throughout this past year to strengthen and enhance our back-of-house product operations structure," Currie said.

"While we realize that it will require continued investment and time to get to best-in-class status, with our new leadership in place we are very focused on building on this stronger foundation to execute our long-term growth strategies."

Lululemon shares were down $9.19 at $50.40 on the Nasdaq market at mid-day Monday, but the stock had been even lower earlier in the morning.

The stock also dropped dramatically on Dec. 12 after its previous guidance announcement was below expectations. Lululemon said at that time that it was expecting between $535 million and $540 million of revenue and earnings of between 78 and 80 cents US.

Prior to the December guidance for the fourth quarter, which spans the important Christmas and new year shopping period, Lululemon shares had been trading above $65 per share for most of 2013 and usually between $70 and $75 per share.

Retail problems

Lululemon isn't the only retailer facing headwinds, however, as American shoppers deal with an uncertain economic recovery and more U.S. giants like Target move into what's already a competitive space in Canada and put pressure on pricing.

But the company has also suffered some specific setbacks of late including its handling of a problem with its black Luon pants, which were sometimes so thin they were see-through.

Lululemon said the problems were due to a style change and production issues and moved to fix them, but new complaints emerged later about the quality and durability of the pricey workout gear.

Chief executive Christine Day, who had been seen as a key part of Lululemon's recent success, announced in the summer she would leave. On Dec. 10, the company hired Laurent Potdevin as Day's successor and said Lululemon founder Chip Wilson would step aside as chairman of the board but remain a director of the company.

Wilson ignited a public relations crisis for the company in November by suggesting to Bloomberg TV that Lululemon's yoga pants don't work well for some women.

His comments about "the rubbing through the thighs" and "how much pressure is there" when some women wear Lululemon pants led critics to accuse Wilson of shaming women's bodies. He later posted a video message online taking responsibility "for all that has occurred."

In December, the retailer warned of a tough holiday season as it worked to win back customers after those missteps, and said same-store sales for the key holiday period would likely be nearly flat even as it reported improved third-quarter earnings.

"This was a company and a stock that could do no wrong for so long and it's a good reminder for investors that even the most pristine of stories in the stock markets can lose a bit of lustre over time," said Craig Fehr, Canadian markets specialist at Edward Jones in St. Louis.

"When you're in the consumer space, you not only have to fight the financial issues, you also have to fight the public persona, the PR issues," he said.

"It's a pretty big storm for them. Not to say they can't weather it, but they are certainly up against a lot of scrutiny from the investment community."

Despite Lululemon's troubles, analysts had been expecting the company's actual results to be slightly above the previous guidance on revenue and earnings, estimating 79 cents per share of adjusted earnings and $542.4 million of revenue, according to Thomson Reuters.

RBC Capital Markets analyst Howard Tubin noted that while the guidance would lead to the first negative same-store sales for the company since the second quarter of 2009 if it plays out, "management also noted they were on track to deliver on their initial guidance through December."

"However, since the beginning of January, sales and traffic trends decelerated meaningfully," he said in a note to clients Monday morning. "The updated guidance assumes these trends continue for the remainder of January."