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Pant Recall Impact Lingers at Lululemon

Firm lowers profit guidance as CEO search continues.

Outside a Lululemon store.

The ongoing effects of the black Luon yoga pant recall might haunt Christine Day through the remainder of her tenure as Lululemon Athletica Inc.’s chief executive officer.

Despite reporting second-quarter profits that were down less than expected and better than the company’s or Wall Street’s estimates, shares of the Vancouver-based apparel marketer fell $3.75, or 5.4 percent, to $65.27 Thursday after it lowered its profit and sales guidance for the year.

During a conference call, John Currie, chief financial officer, tied the lowered guidance to the firm’s recall, dating back to March, and the domino effect it has had on assortments since then. As the company focused on restocking first-quality Luon product, other deliveries lagged. “While we were successful in getting back in stores with Luon, the effort required to get there had a lingering impact on our commercialization and sourcing team’s ability to be ready to hand off to our vendors the current season. We anticipate this knock-on effect to continue to impact timing of product deliveries in [the third quarter] and through the balance of the year.”

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Full-year earnings are now expected to be in the range of $1.94 to $1.97 with revenues of between $1.63 billion to $1.64 billion. The June guidance was for earnings per share of $1.96 to $2.01 and revenues of $1.65 billion to $1.67 billion.

Day, who said in June that her tenure as ceo will end upon the appointment of a successor, said during the call that the search for her replacement is continuing, with the narrowing of the list from “several high-caliber candidates” to a ceo designee in the “coming months.”

“The start date for the successful person will be dependent on the required notice period, move to Vancouver, etc.,” she told analysts.

But there was progress to report on several of the vacancies with which Day has wrestled recently. Steven Berube, formerly vice president of production, distribution and customer service at Cole Haan, has joined the company as senior vice president of distribution and logistics. Additionally, Jennifer Battersby, formerly senior vice president of Mast Industries with responsibility for Victoria’s Secret’s production in Asia, has joined the company as senior vice president of sourcing, quality and commercialization in a consolidation of leadership involving functions that had previously been split.

The post of executive vice president of product remains open. Day said management of that appointment is likely to be “coordinated with the ceo hire.”

For the 13 weeks ended Aug. 4, net income fell 1.3 percent to $56.5 million versus $57.2 million in profits during the second quarter of 2012, translating into 39 cents a diluted share for both periods. The 2013 performance was better than the consensus estimate of 35 cents and the range provided by the company in June of between 33 and 35 cents. Revenues rose 21.9 percent to $344.5 million from $282.6 million. Same-store sales rose 8 percent on a constant-dollar basis, better than the firm’s June target of 7 percent. The store count rose to 226 from 189 a year ago.

Among apparel and retail stocks traded in the U.S. and tracked by WWD, only The Men’s Wearhouse Inc. experienced a steeper decline in share price than Lululemon on Thursday. The men’s wear retailer reported lower sales and earnings for the second quarter on Wednesday and brought profit projections down for the remainder of the year, and its shares were off 12.1 percent to $34.08.

Lululemon, which enjoyed nearly uninterrupted growth in its market capitalization since going public in 2007, saw its shares tumble in March after the black Luon recall, and again in June, when Day disclosed her plans to leave the firm. Its 52-week high of $82.50 was reached on June 10, just prior to news of Day’s impending departure, and the corresponding low of $59.60 just 11 days later.

The company said it had entered into an agreement with Noble Biomaterials giving it global exclusivity for the firm’s X-Static antimicrobial technology for performance apparel.