Companies & Industries

Lululemon: Shares tumble over leadership void and inventory problems

CEO to exit, inventory problems.

Lululemon Athletica Inc. is again announcing some unwanted news, and it is much more revealing than its see-through yoga pants.

Shares Tuesday morning slid 16% on news of leadership changes as investors’ love affair with the growth stock appears to have abruptly soured. The fall is being attributed in part to CEO Christine Day’s announcement that she is leaving the company; analysts at BMO Nesbitt Burns describe the Canadian retailer as being in a ‘state of turmoil’.

Not only does the company now have to begin searching for new leadership, but it also needs to fill senior positions in its supply chain, product and logistics areas, leaving a somewhat gaping void in upper management.

The Lululemon “story today is not exactly the same [Lululemon] story that we’ve come to love over the last several years,” wrote RBC analysts Howard Tubin and Tal Wooley in a research note this morning.

John Zolidis, of Buckingham Research Group, recommended that investors “reduce positions” in a note published Tuesday regarding Lululemon’s performance.

“(Lululemon) has gotten a free pass from investors despite recurrent execution issues,” Zolidis wrote. Over time, he expects the company’s sales growth to slow as competition increases, and sales become weaker in the U.S. than they are in Canada.

In addition, the company says it will later this month delist from the TSX exchange in order to cut down on costs, citing minimum trading volume on the Canadian exchange. It will continue to trade on the NASDAQ.

Tubin and Wooley said they felt the brand is strong and the long-term prospects for the company are robust, but the company is in the midst of a “major management transition, and with this transition comes more uncertainty.”

CEO Day said the company’s vision for the next five years had been set and now was a good time to depart the company.

“Being a part of Lululemon for the past five-and-a-half years has been an incredible journey. I am proud of building a world class team that has produced one of the best growth, brand and profit stories in retail,” said Ms. Day.

Despite today’s market reaction, the company had a successful first quarter, reporting yesterday that net revenue increased 21% to $345.8 million from $285.7 million compared to last year.

Lululemon is known to have a devoted following of customers but it has arguably made its shareholders even more happy. The stock has gone from $18 when it first debuted in the summer of 2007 to the equivalent of $170—which included a two-for-one stock split in 2011.

The company is still recovering from product flaws in its signature black luon material that in March prompted a broad recall of women’s yoga pants. The company suffered a $17.5 million inventory provision as yoga pants were yanked from stores and demand went unfulfilled. As a result, Chief Product Officer Sheree Waterson left shortly afterwards in April.

Tubin and Wooley noted that the lack of luon compounded inventory problems as not enough black pants and too many colourful tops made a poor combination for consumers.

“We cannot say with certainty that the strategic vision of the company will not change as the new management team is put into place. Hence, we cannot tell investors to purchase the shares, despite today’s likely sell-off,” Tubin and Wooley wrote.

Finding a replacement for Day will certainly calm nerves but the search for exactly the right fit for the custom brand could be difficult.

Whoever it is, they’ll need to understand and fit within the unique business culture that Lululemon has become known for.

“It’s culture fit first, skill set second,” said Sam Poser, a senior apparel research analyst with Sterne Agee.

“They definitely need somebody with product background, but really I think it’s much more important to have somebody there who understands the Lulu brand,” said Poser.

The new CEO will need to have a good understanding of what draws customers to Lululemon stores, and what compels them to spend, say, $100 on yoga pants. The company may be facing product competition from other sellers of active wear, but hardly any other retailer with similar products has managed to replicate the Lululemon shopping experience.

“They could make these great yoga pants, shirts, jackets, or whatever. But if they didn’t have the same level of service when you go into the stores, they wouldn’t sell any product,” said Poser.