Why Lululemon Stock Could Get Crushed On Earnings

by Will Ashworth | December 9, 2013 8:42 am

Lululemon (LULU[1]) announces third-quarter earnings Thursday before the market opens, and any bad news in the report could result in LULU stock getting crushed.

lululemon-stock-lulu-earningsSo far in 2013, Lululemon stock has been in a major slump. Thanks in large part to the company’s sheer yoga pants debacle, shares of LULU have stalled. The S&P 500 has gained almost 27% since Jan. 1, but Lululemon stock is off over 8%.

But sheer yoga pants aren’t the only thing that LULU fans should be worried about. Let’s take a closer look at two major headwinds for Lululemon stock heading into earnings.

The Lululemon Stock Lawsuit

It’s never a good sign when a company is sued by its own shareholders for intentionally misleading investors in order to maintain its sky-high stock price. But that’s actually what the Louisiana Sheriffs’ Pension & Relief Fund contends as lead plaintiff in its lawsuit against Lululemon.

Shareholders have accused LULU of hiding the defects of its sheer yoga pants, and of selling its Lululemon pants at a deep-discount in order to protect market share against bigger competitors like Gap (GPS[2]), VF Corp. (VFC[3]) and others. Lastly, the lawsuit claims that that the LULU board hid the fact they were in discussions to replace CEO Christine Day. Day resigned June 10, sending Lululemon stock spiraling downward and causing an uproar from investors.

In fact, Lululemon stock lost $2.6 billion in two days of trading after Day resigned. And since then, Lululemon stock has regained just 30% of those losses.

Of course, Lululemon claims that this is all nonsense and that the case should be dismissed. But really, it wouldn’t be the first time a company’s stretched the truth in an effort to maintain its place on top of the mountain. Plus, the fact that founder Chip Wilson sold almost 2 million shares of Lululemon stock at prices greater than $80 in the 30 days leading up to Day’s resignation should make any sane person stop and question the timing of these developments.

Lululemon Stock and a Lack of Leadership

One would also think that a company facing a lawsuit of this nature would do everything in its power to play nice with investors, customers, the media — heck, the entire world. Instead, Lululemon founder Chip Wilson told Bloomberg’s Street Smart[4] last month that Lululemon pants aren’t meant for fat women. According to Wilson, extra-large thighs rub and stretch the material, causing the sheer yoga pants.

Sure, Wilson apologized. But on that mishap alone, I think Lululemon stock should be downgraded.

JP Morgan (JPM[5]) analyst Brian Tunick also noted Lululemon’s leadership problems back in mid-November, saying:

“The lack of visibility on the next Chief Executive is likely weighing on sentiment … We stress the importance of Lulu’s unique culture as it searches for CEO candidates, as well as any other prospective hires for that matter … Realistically, this corporate culture isn’t for everybody.”

You’re darn right it isn’t. Who wants to work for a company whose largest shareholder is two steps removed from a caveman?

Tunick sees a new CEO in place by April. But unless it’s a home-run announcement, it’s just another reason Lululemon stock could be ready to tumble.

Bottom Line for Lululemon Stock

Lululemon stock is already lacking momentum, as the company lowered its 2013 guidance on the top and bottom lines when it reported second-quarter results back in September. For Q3, LULU stock analysts are looking for earnings of 44 cents per share while the company expects between 39 cents and 41 cents per share.

If the company misses its own guidance Thursday, expect Lululemon stock to drop at least 10% on the news. While it’s not guaranteed that this will happen, there certainly are enough danger signs to at least make folks wait until after earnings if they’re interested in buying Lululemon stock.

But personally, I think LULU’s woes will continue even when a new CEO is brought onboard. The company’s competition is catching up, causing growth to slow for LULU.

So all in all, I wouldn’t own Lululemon stock.

As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.

  1. LULU: http://studio-5.financialcontent.com/investplace/quote?Symbol=LULU
  2. GPS: http://studio-5.financialcontent.com/investplace/quote?Symbol=GPS
  3. VFC: http://studio-5.financialcontent.com/investplace/quote?Symbol=VFC
  4. Bloomberg’s Street Smart: http://www.news.com.au/business/companies/lululemon-founder-chip-wilson-tells-bloomberg-thighs-are-to-blame-for-sheer-pants/story-fnda1bsz-1226755748743
  5. JPM: http://studio-5.financialcontent.com/investplace/quote?Symbol=JPM

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