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Lululemon Has Profit Drop in Q1

The yoga apparel firm lowers forecast for the year.

A view of the Lululemon Athletica store in London.

Lululemon Athletica Inc.’s issues are far from over.

Shares of the yogawear retailer slumped 15.9 percent in over-the-counter trading Thursday after the company said first-quarter profits fell 59.9 percent and lowered guidance for the year.

Laurent Potdevin, chief executive officer, noted three key priorities to turn the company around — build the product engine to consistently push new offerings in men’s and women’s, implement a new branding and communications strategy and international growth. Investors didn’t seem impressed, at least concerning Lululemon’s short-term fortunes.

That’s in part because Potdevin also said, “We knew heading into 2014 that driving sales in the first half of the year would be impacted by the suboptimal product assortment combined with the traffic trend. [Second-quarter] sales have started off behind plan and comps are more impacted than we had originally anticipated.”

He noted that while there’s been progress on the product development front and the redesign of the retailer’s go-to-market calendar that will start to reap benefits in the second quarter of 2015, it won’t be until the first quarter of 2016 that the company will have a “fully operational world-class product engine to support a global omnichannel multibrand business with localized assortment capability.”

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Nearly 36.4 million shares changed hands, compared with a three-month average volume of 3.1 million, as the stock on Thursday closed at $37.25.

For the three months ended May 4, net income was $19 million, or 13 cents a diluted share, from $47.3 million, or 32 cents, in the year-ago quarter. The drop was mostly due to a tax expense related to planned repatriation of foreign earnings that will be used to fund the company’s $450 million share buyback program. Net revenue rose 11.2 percent to $384.6 million from $345.8 million.

The company, which said its board has approved the share buyback program, also lowered guidance for the second quarter and full year.

For the second quarter, the firm expects net revenue of between $375 million and $380 million, and diluted earnings per share of 28 cents to 30 cents.

For full fiscal year 2014, net revenue is forecasted in the range of $1.77 billion to $1.80 billion, with diluted EPS between $1.50 and $1.55.

Potdevin spoke during a conference call with Wall Street analysts about Lululemon implementing a social platform that would allow it to “leverage the power of our investor community,” as well as an in-store technology rollout to enable shoppers to buy from the larger online inventory that’s more encompassing than what’s in the stores. While he spoke about how the digital project allows the company to target new “guests” and drive additional sales, he didn’t elaborate on what would be new to the social platform. Executives on the call said it will go live in September to “gather up real-time, all of the work that’s happening in our communities and sort of be able to share that in a much more efficient way.”

Separately, the company said chief financial officer John Currie intends to retire by the end of the fiscal year.

Analysts remained cautious about Lululemon’s near-term prospects. Jefferies’ Randal J. Konik said, “Bottom line, the picture here doesn’t seem to be getting much better as other retailers show signs of improvement and we believe competition is becoming a more pressing issue. Traffic has picked up somewhat, but conversions down is a cause for concern, as we believe this highlights fundamental flaws in the core [business].”

Wells Fargo’s Paul Lejuez said that while “we believe recent product issues will not affect long-term demand or customer loyalty, quality control infrastructure investments may take longer than anticipated and drag on returns.”