It'll Take More Than Yoga to Bend Lululemon Back Into Shape

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Lululemon Athletica (LULU) is starting to take on the most distinctive feature of last year's recalled batch of black Luon yoga pants: Everybody can see right through the retailer when it's stretched.

Shares of the high-end workout apparel seller plunged 16 percent on Thursday after it posted disappointing quarterly results. Net revenues climbed 11 percent to $384.6 million as new stores and a healthy uptick in online sales helped offset a 4 percent decline in comparable corporate-store sales for the period. The 263-store chain's earnings clocked in at $0.34 a share before accounting for a one-time hit to cover the tax bite on repatriating foreign profits, just ahead of the $0.32 a share it posted a year earlier.

The results aren't impressive, but Lululemon's outlook is even more grim. It foresees a profit of no more than $0.30 a share on $375 million to $380 million in revenue. Analysts had anticipated more. More importantly, net income will come in sharply lower than it did a year earlier and top-line growth continues to decelerate.

The bad news doesn't end at the current quarter. Lululemon is watering down its revenue and profit targets for all of fiscal 2014.

Plow Pose

The stock hit a three-year low on the news, and shares continued to move lower on Friday morning after a Robert W. Baird analyst downgrade made itself felt. The analyst foresees a "choppy transition year" that isn't likely to go smoothly for investors. It's not an original sentiment. Lululemon itself describes 2014 as a "transitional" year.

Sales are slowing. Comps are in the red. Profitability is starting to go the wrong way. Inventory levels are rising faster than sales, suggesting that margins won't get any better as it clears its way through the unsold inventory that's accumulating.

Lululemon seemed to be on top of the world until about a year ago when everything began to unravel. Before the Luon pants recall fiasco, the upscale retailer was a market darling with consistent double-digit comparable corporate-store sales growth. Investors gobbled up the Vancouver-based chain as the premium brand worth owning at a time when the yoga craze was in full swing and affluent soccer moms wanted a more stylish look.

Lululemon was at the right place at the right time, but everything has gone wrong since the recall.

Downward Facing Dog

Paying nearly $100 for a pair of yoga pants may seem outrageous to many people, but Lululemon shoppers weren't flinching. As more and more people began showing up on yoga mats and at pilates classes with Lululemon clothing it became a phenomenon.

It's hard for a luxury fashion brand to stay on top forever. Just ask Coach (COH) which has seen Michael Kors (KORS) eat its lunch over the past two years when it comes to expensive handbags. Every few years finds a new designer denim name knocking out the former champs. This trend would have eventually happened to Lululemon, but a rough 2013 featured the yoga pants recalls, the CEO departure, and some embarrassing founder comments sinking the brand.

The problem with the pants was the first shoe to drop. In March of last year the shipment of black Luon yoga pants weren't exactly right. They were too sheer, resulting in the pants being see-through in some circumstances. Lululemon's quality controls should have kicked in, but this was a problem that didn't materialize until buyers actually began wearing them and started to bend over in stretching exercises. Lululemon issued a recall on the pricey yet flawed pants, and a few weeks later its once popular CEO announced that she would be stepping down.

Later in the year it was founder and chairman Chip Wilson making waves by blaming some of the problems with Lululemon's clothing on the weight of the people wearing them.

"Some women's bodies just actually don't work for it," he told Bloomberg TV in light of the pilling problem that its yoga pants were having. "It's really about the rubbing through the thighs, how much pressure is there."

It's not the first time that Wilson turned heads for his controversial comments, but it was the last time that he did so as chairman. He stepped down last year after making those remarks.

The future won't get any easier for Lululemon. It has a healthy cash balance, and it's putting that to work with an aggressive share buyback. Its new CEO will have to plot a course that restores both its brand and its product quality. Lululemon was on top of the world a little over a year ago, but now it's down on the mat -- and it's not a yoga mat.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Coach, Lululemon Athletica, and Michael Kors Holdings. The Motley Fool owns shares of Coach and Michael Kors Holdings. Try any of our newsletter services free for 30 days.

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NAOMI

Lulu has done everything it can do to allienate approximately 95% of the women in the US. Telling women that they manufacture for the "thin" crowd will make the company go down the drain faster than anything else. I wouldn't spend a penny on anything they make nor would I say a kind word about them. Word of mouth kills!

June 14 2014 at 11:46 AM Report abuse rate up rate down Reply