Where the Problems Creep Up
Lululemon’s comparable store sales climbed just 1% in the first quarter, 11 percentage points worse than a year earlier. If not for the strong showing by its direct-to-consumer business, the showing would have been much worse.
Also, comparable corporate store sales, which excludes direct-to-consumer, experienced a 4% decline year-over-year against the backdrop of a 7% increase in Q1 2013. Once the darling of retail, Lululemon is facing some of the same problems plaguing the broader retail sector at the moment, which is fitting considering Lululemon stock is mirroring much of the sector, too.
As mentioned before, Lululemon is taking a one-time charge so it can repatriate some of its overseas earnings to then buy back LULU stock. On one hand, you can interpret this as a sign its shares are undervalued. On the other … it might just be saying LULU has run out of ideas for growing its business and feels the best allocation of capital is into its shares. (Can a dividend announcement be that far off?)
In its Q1 press release, Potdevin stated “… 2014 is very much a transitional year for lululemon, and we are on track with the improvements we have set out to achieve … Despite a reduced outlook, I am confident that the work we are doing today will only enhance our premium positioning as we continue to lead as the market innovator.”
That’s great. Except Chip Wilson doesn’t see it that way.
The Lululemon founder voted against the two directors because he sees them leading a board that’s short on long-term vision, not to mention a lack of product innovation. The directors were easily re-elected setting up a potential battle royal between them and Wilson, who still owns 27% of LULU stock and believes its culture is slowly slipping away.
Until this issue is resolved, Wilson is going to be a major thorn in Potdevin’s side.
In February, I said value investors should stay away from LULU stock. At the time, it was trading around $50. However, I did suggest that patient investors swing away, keeping some money on the sidelines in case it drifted down into the early $40s or high $30s.
Well, here we are.
I didn’t expect Lululemon stock would drop so quickly, but now that it has, you definitely should consider buying some at these prices while holding a little stash of cash in case the ground shifts in the future.
Long-term, I think Laurent Potdevin has the chops — not to mention the pedigree — to turn this around. Unfortunately, as Gap CEO Glenn Murphy can attest, you never know when the turnaround’s ultimately going to take hold. Only the passing of time can get Lululemon and LULU stock out of its tailspin.
Unfortunately, it’s that simple.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.