Scared investors flee as Lululemon cuts outlook
Lululemon Athletica Inc. is feeling the weight of its own missteps, and a tighter yoga wear retail market, as its performance and short-term prospects weaken.
On Thursday, company executives said sales at existing stores were slowing and the product offering was still "suboptimal." This comes as the company is working to recover from a massive product recall last year and polish Lululemon's soured image. All while gearing up for an ambitious overseas expansion.
Amid its struggles, the Vancouver-based retailer, once a stock market favourite, cut its financial outlook on Thursday, spooking investors who sent the stock down almost 16 per cent to $37.25 (U.S.) on Nasdaq.
To compound matters, founder Chip Wilson, who owns 27 per cent of the shares, is pushing publicly for strategic changes and blaming the board of directors for focusing too much on short-term results to the detriment of the company's core values of product innovation. Mr. Wilson tried unsuccessfully this week to push out two board members, including the chairman who recently replaced him as chair (Mr. Wilson still sits on the board).
"Our parents are fighting and it's awkward," said Laurent Potdevin, who took over as chief executive officer in January from Christine Day.
In a year of transition, Lululemon faces the uncertainty of operating under a new leader and a host of other top new executives – with still more to come – while competition gets stiffer and the importance to stand out becomes ever more critical.
"Clearly, the business has not turned," said Faye Landes, retail analyst at Cowen and Co. in New York.
"Competition continues to increase," added John Morris, retail analyst at BMO Capital Markets. "With founder Chip Wilson in public opposition to the board, quality issues still present, customer relations at risk and now an unproven shift in merchandising strategy in the works and recent turnover in senior management ... we have low visibility on shares of Lulu."
Mr. Potdevin said during a conference call to discuss first quarter results that Lululemon is on track to improve operations and return to historic gross margins in the mid-50-per-cent range. In its first quarter of 2014, those margins stood at 50.9 per cent of sales, up from 49.4 per cent a year earlier.
He said the company is launching new initiatives to win back customer loyalty and gain new business. It is opening temporary "pop-up" stores to raise brand awareness, teaming with Google to reach more digital shoppers and giving consumers in its physical stores the chance to shop Lululemon online to access more products.
Already, the move to provide e-commerce in stores has helped boost bricks-and-mortar store sales by 1 per cent and cybersales by 4 per cent, he said.
And Lululemon is moving quickly to collect more information about its customers to serve them better, something it failed to do in the past, he said. "We've got a very loyal guest [customer] and we should know a lot more about him or her."
He said the need for more information is both a curse and a blessing. "The curse being that we don't have a lot of data right now; the blessing being that we can build a system that will really take us in the future."
Still, so far in the current quarter, same-store sales at physical outlets open a year or more – an important retail measure – are continuing to decelerate, John Currie, chief financial officer, told analysts. While traffic to stores is up, fewer people coming to stores are making purchases, he said.
The softer sales are partly a reflection of "suboptimal" product offerings, Mr. Potdevin said.
"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, added. And the retailer failed to stock enough seasonal products rather than the all-season "core" products, she said. Even so, the plan to carry more seasonal items carries risk because their margins are lower than those of the basics, analysts warned.
Adding another note of uncertainty, the company said it would search for a new CFO because Mr. Currie, who took that position in 2007 and helped take Lululemon public, is retiring at the end of the year to indulge his passion for skiing.
In its first quarter, Lululemon's profit fell to $18.98-million, or 13 cents a share, from $47.28-million, or 32 cents a share a year earlier. Revenue rose to $384.6-million from $345.8-million.