Lululemon (LULU) yoga-pant sales hit by lower-priced knock-offs, analyst warns

Peter Kennedy Peter Kennedy, Stockhouse
0 Comments| December 13, 2013

It hasn’t exactly been a stellar week for investors in Lululemon Athletica Inc. (NASDAQ: LULUStock Forum), the Vancouver based yoga pants retailer that is still reeling from communications gaffes by founder and Chairman Chip Wilson.

Since the company announced on December 10, 2013 that Wilson will resign as Chairman before the next annual meeting in June, the stock has lost another 17% of its value, falling to $58.99 in afternoon trading, Friday, leaving a market cap of $8.6 billion, based on 145 million shares outstanding.

That makes Lululemon a disaster for investors who bought in when the stock was trading at over $82 in June.

For months, Lululemon has been struggling to deal with issues regarding the sheerness of its Luon yoga pants after pulling them from store shelves in April because they were see-through, costing the company millions of dollars in sales.

At the time, the company blamed problems in the spring on a style change and production issues.

But in an interview last month, Wilson told Bloomberg TV that production problems may not be the only issue.

“Quite frankly, some women’s bodies just actually don’t work for it,’’ he said. “It’s really about the rubbing through the thighs, how much pressure is there.’’

And if predictions by analysts are any indication, the situation could get worse for investors in Lululemon, which reported a third quarter profit of US$66.1 million or 45 cents on Thursday, 4 cents ahead of forecasts, but said same stores sales are expected to be flat in the crucial fourth quarter.

Christian Buss of Credit Suisse has downgraded his rating on the stock to “neutral” from “outperform,” and reduced his price target price to US$59 from $78.

He did so after describing the company's guidance as a cause for concern.

“Given improving product availability in stores and online where stock-keeping unit counts are up 14% since August, and up 48% year on year, we no longer think that product flow issues are holding back the (year-over-year comparisons) significantly,’’ he said.

“Instead, we view it as increasingly likely that recent quality issues and communications missteps, as well as the increase in availability of lower-priced knock-offs of their core assortment are holding back demand. This suggests a structural change in the demand equation and suggests caution is in order going forwards,’’ Buss said in a research report.

Meanwhile, analysts at Janney Montgomery Scott also cut their target price to $76 from $90, while Mizuho has dropped its target to $60 from $70.

Earlier this week, Lululemon said it will pay its new CEO Laurent Potdevin at least $3.1 million in salary, stock and bonuses in his first year on the job.

He will takeover as CEO next month from Christine Day. (with files from The Canadian Press).


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