Lululemon Earnings: 3 Things to Watch

by Alyssa Oursler | September 3, 2013 10:45 am

It’s been a rocky year for one-time yoga darling Lululemon (LULU[1]), and that could continue in a little more than a week when LULU releases its second-quarter earnings.

Lululemon┬ástock soared nearly 55% over the course of 2012, but is sitting 6% in the red so far in 2013. The bulk of the downfall came after the company’s last earnings report, as LULU’s earnings beat was overshadowed by CEO Christine Day’s unexpected departure, and a 20% selloff ensued. The stock has regained some lost ground since hitting a 52-week low in late June, but still remains around 12% off its all-time high levels.

Let’s take a look at what you need to know heading into the company’s Sept. 12 earnings release:

Sheer Madness

Back in March, Lululemon recalled nearly a quarter of its popular black Luon yoga pants for being too sheer. This was a notable slip-up because, as Beth Kowitt and Colleen Leahe recently reported for Fortune magazine[2], one of the main reasons founder Chip Wilson started the company was to fix that precise problem with yoga pants. That reality that suggests the company might be losing its way.

Of course, investors should care for another reason: The bulk of the incident’s impact — which is expected to total a $67 million loss in revenue for the year — will be felt in the second-quarter numbers Lululemon is about to report. That’s part of the reason current earnings estimates are for 35 cents per share — a 10% year-over-year decline.

If the earnings drop comes in worse than expected, the entire “image issue” of Lululemon could easily resurface.

Leadership

Another thing to watch for: news of a new CEO. While Day announced her voluntary resignation not long after the recall, the former Starbucks (SBUX[3]) executive remains in charge until a replacement is found. The company said the transition to a new head honcho was expected to come in next six months … and we’re about halfway there.

Investors seem to care a lot about leadership, considering Day’s departure sent the stock tumbling big-time. If the company still is lost as to who will lead it when the next conference call rolls around, don’t be surprised if investors remain skeptical.

Outlook

Which brings us to the final point: Lululemon’s outlook. Retailers across the board have expressed concerns about consumer spending in the second half of the year, while earnings estimates for Lululemon’s third quarter have slid 3 cents in the past three months.

Sure, the company is attempting to expand into men’s and girls apparel, but growth beyond its core products will be anything but easy[4] — especially considering competition in the yoga space is heating up. Gap (GPS[5]) has launched its own line (Athleta), while do-it-all retailers like Target (TGT[6]) are trying to steal a lower-end slice of the yoga pie.

Plus, Lulu has faced several other quality issues like the sheer-pants scandal, and according to the Fortune piece, it lacks solid infrastructure.

Pile all that atop LULU’s CEO uncertainty, and you have a lot of questions that need answered before investors will feel confident in Lululemon again.

As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities.

Endnotes:
  1. LULU: http://studio-5.financialcontent.com/investplace/quote?Symbol=LULU
  2. reported for Fortune magazine: http://money.cnn.com/2013/08/29/leadership/lululemon-day-wilson.pr.fortune/index.html?section=magazines_fortune
  3. SBUX: http://studio-5.financialcontent.com/investplace/quote?Symbol=SBUX
  4. will be anything but easy: http://investorplace.com/2013/08/the-real-problem-lululemon-is-facing/
  5. GPS: http://studio-5.financialcontent.com/investplace/quote?Symbol=GPS
  6. TGT: http://studio-5.financialcontent.com/investplace/quote?Symbol=TGT

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