Lululemon Launches Buy-back As Comps Decline Clouds Future

The maker of yoga inspired performance apparel reported comparable-store sales declined 4 percent in currency-neutral (c-n) terms in the fiscal quarter ended May 3, compared to an increase of 7 percent in the year ago quarter. That represented a blend of 2 percent comps growth in the United States and a 5 percent decline in Canada. CEO Laurent Potdevin, who was hired last year, said comps growth was below plan in the current quarter, reinforcing concerns the company’s brand’s best days are behind it following a series of missteps last year that called into question the quality of its products and leadership.

 

Potdevin said Lululemon has relatively little data on consumer sentiment toward its brand, but research conducted in March by The SportsOneSource Group reveals the company's vaunted brand loyalty has taken a hit in the wake of a major recall and other negative publicity last year. Among active women who said they had bought Lululemon products, 13 percent said recent news about the brand would make them less likely to purchase its products again. That compared with 42 percent who responded they were more likely and 40 percent who responded recent news would not affect their decision. Among women who said they would not buy Lululemon again, 34 percent said they would instead buy another brand. The most common brands mentioned by those respondents were Under Armour and Athleta.

 

LULU reported overall sales grew 11.2 percent in the fiscal first quarter, boosted in part by 9 percent growth in men’s

comps and a record 39 percent comps growth rate at the company’s Ivivva brand, which caters to girls through its own stores.  Gross margins also improved 150 basis points, but were more than offset by a one-time earnings charge of $45 million, or 21 cents per share, the company took to reflect costs associated with a $450 million stock buy-back plan it announced last week. The sum reflects what LULU expects to pay in income taxes when it repatriates profits earned in Canada to raise cash need to buy back its stock. The charge reduced net income by nearly 60 percent, or by $28.3 million, during the quarter. 

 

Potdevin said the company now expects c-n comp store sales to decline in the low-to-mid-single digits in the fiscal second quarter, but increase in the low-single digits for the entire fiscal year as updated core, or non-seasonal, products come to market in the back half of the year. CEO Laurent Potdevin said second quarter sales started off behind plan and comps have been more impacted than originally anticipated.

 

The Vancouver, BC-based company also announced the retirement of CFO John Currie and Vice President of Corporate Communications Therese Hayes, who have been the company’s primary liaisons with Wall Street. 

 

The big swing in comp store sales and continued changes in the boardroom troubled some stock analysts, who are trying to gauge whether the once high-flying brand can recover from the recall last year of pants made from its Luon fabric that have historically accounted for 17 percent of sales. LULU recalled the pants in March, 2013 after women complained they became see-through, or too sheer, during stretches and yoga poses. Some Lululemon store managers made matters worse when they insisted customers bend over in stores for “sheer tests” before approving credits. More negative publicity followed when founder and retired chairman Chip Wilson, who has a long history of spurring controversy with off-the-cuff remarks, told a television interviewer that the problem was exacerbated by the size of some women's thighs.

 

The recall exposed a lack of quality control at the rapidly growing company that resulted in the departure of the company’s top product development executive and CEO Christine Day. It has since led to friction between Lululemon founder Chip Wilson, who still owns 27 percent of the company’s stock, and some outside directors on the company’s board. On Wednesday, a day before LULU reported earnings, Wilson said that while he continues to support management, he was recommending shareholders not re-elect two of the company’s outside directors.

 

“I have found a palpable imbalance in board representation, which is heavily weighted towards short-term results at the expense of product, culture and brand and longer-term corporate goals,” Wilson said in a statement released Wednesday to the media. “I believe this is impacting the company's prospects. My vote today sends a signal to the financial community that the company must address this imbalance if Lululemon is to fully recover.”

 

In a response later in the day, the board said it remains focused on overseeing a strategy that will build long-term value.

 

In Lululemon’s earning call the next day, Potdevin outlined several initiatives “to create long-term guest loyalty” and said the benefits of ongoing product development and supply chain initiatives would begin yielding results in the second quarter of 2015 and be fully operational by the first quarter of 2016.

 

In the near term, the company has opened 14 pop-up stores in a bid to sell through inventory, which was 23.4 percent higher at quarter’s end than a year earlier, at full price. LULU also completed an upgrade to its e-commerce site during the quarter that enables customers to see which U.S. stores have a particular SKU in-stock. The feature is already generating 1 percent of retail sales and 4 percent of e-commerce sales in the United States, which generates about 70 percent of the company’s sales. Longer term, LULU is building a social media platform for its local ambassadors and adding yoga studios and elite athletes to its affiliate marketing network. Internationally, it’s on track to have a bricks-and-mortar retail presence in eight countries outside North America by the end of the year.

 

“By the end of 2017, we plan to be present in all major European and Asian regions, with more than 20 stores in both Europe and Asia,” said Potdevin.

 

The assurance did little to sway some analysts.

 

“We contend that increased pop up stores may alleviate the near-term pain of high inventory, but it is not a fix to the

core issues, namely consumer engagement and competition,“ reads a report from Sam Poser and Ben Shamsian, who advised clients of the regional brokerage firm Sterne Agee avoid the stock. “It appears as if the aforementioned issues have cost LULU customers and lost customers are hard to recover.”

 

The report also criticized the high cost of the share buyback plan and said the departure of Currie and Hayes was “a significant blow to a company with a troubled investor and consumer message, complicated by Chip Wilson's (founder) loud voice.”