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Lululemon Joins Fray With Cut to Forecast

The post-Thanksgiving shopping hangover that carried through Christmas appears to be stubbornly hanging on into January.

Lululemon Athletica

The post-Thanksgiving shopping hangover that carried through Christmas appears to be stubbornly hanging on into January.

Brought on by slow traffic and heavy promotions that have persisted into the new year, a flood of profit warnings that began in earnest last week continued Monday. It was led by Lululemon Athletica Inc.’s disclosure that a slowdown this month had caused it to reduce its profit expectations for the fourth quarter to a range of between 71 and 73 cents a diluted share from an earlier range of between 78 and 80 cents. Same-store sales, initially expected to be flat, are now seen falling in the low- to midsingle digits.

And Lululemon, still fighting to regain its equilibrium following a year when it was besieged by product problems and waning demand, was hardly alone. Ascena Retail Group Inc., parent of Justice and Lane Bryant, brought down fourth-quarter profit projections, as did Express Inc. and Stage Stores Inc.

They joined a long list of companies who have similarly offered reduced guidance, including Target Corp., victim of a security breach now estimated to have affected more than 100 million customers; The Bon-Ton Stores Inc., hit by unseasonably wintry weather, and L Brands Inc., with lower comparable-store sales than expected in December.

Lululemon saw its shares decline 16.6 percent, to $49.70, following its Monday update, made in advance of its appearance today at the ICR Xchange in Orlando. Bon-Ton’s shares fell 13.5 percent, to $13.41, while the S&P 500 Retailing Industry Group endured a 1.7 percent decline to 915.55.

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Not all the reports coming in ahead of ICR were negative and Wall Street rewarded the winners on Monday. New York & Company Inc. shares closed at $4.62, up 5.2 percent, after it reported a 1 percent increase in comps for November and December and narrowed expectations for operating income to the upper end of its previous guidance. Christopher & Banks Corp. shares rose 4.9 percent to $7.77 when it maintained its guidance for earnings, with improvement in gross margins compensating for loss of sales due to weather-related closures.

Weather was one of several issues, including an abbreviated holiday calendar, that broke badly for many retailers this holiday season.

“We were on track to deliver on our sales and earnings guidance through the month of December,” said Lululemon chief financial officer John Currie. “However, since the beginning of January, we have seen traffic and sales trends decelerate meaningfully.”

The company on Dec. 10 named Laurent Potdevin, formerly president of Toms Shoes, as chief executive officer, succeeding Christine Day, and Michael Casey as nonexecutive chairman, succeeding founder Chip Wilson.

UBS analyst Roxanne Meyer wrote in a research note Monday that, while “weather played a role” in the softness of the company’s business, “so did less compelling merchandise as evidenced by a slowdown in the less weather-sensitive online channel. Core product continues to be slower with elevated inventories expected” for the first half of the year.

Jefferies analyst Randal Konik said the recent appointments of Potdevin and new general merchandise manager Tara Poseley are expected to help the company, “though we don’t expect an overnight fix. In addition to systems problems…the new team has the greater task of restoring LULU’s recently tarnished reputation. This is happening when a host of competitors like Athleta and Under Armour are performing well and taking market share.”

Prior to its presentation at ICR Monday, Express lowered fourth-quarter profit projections to a range of between 57 and 61 cents from its previous range of between 66 and 71 cents on expectations of comps that are flat to up in the low-single digits.

Michael Weiss, ceo, said, “January traffic has been weak and we have remained promotional and expect to maintain this stance throughout the month.”

Weiss noted that, when it first issued its now reduced fourth-quarter guidance in December, the company “contemplated a promotional holiday season as well as a slowdown in traffic after the Thanksgiving week. What we experienced was a drop in traffic that was even deeper than anticipated as consumers waited until much closer to Christmas to shop.”

To capitalize on the available traffic, Express extended the duration and depth of discounts and was satisfied with its effort to clear inventories, which are now expected to be up in the low- to midsingle digits at the close of the fiscal year this month but “more heavily weighted to spring product than at this time last year,” Weiss said. “Furthermore, we have significant open-to-buy dollars available for investment during the spring season.”

Ascena took earnings per share projections for the year’s final quarter to a range of $1.10 to $1.15 from the previous span of $1.25 to $1.30 as it reported a 2 percent decline in same-store sales for the November-December period offset by a 27 percent increase in e-commerce. The EPS figures exclude extraordinary items, such as those related to its integration of its acquisition of Charming Shoppes.

While Lane Bryant, which was acquired with Charming Shoppes, generated a seasonal comp increase of 8 percent, Justice was down 3 percent on a comp basis.

David Jaffe, president and ceo of Ascena, told attendees at ICR that Justice, merchandised for the tween market, had suffered from a naggingly promotional climate that began with the back-to-school season “and never really eased. We also got hit on the margin level because we had to mark down excessively beyond our plan to clean out goods.”

He observed that customers were doing their fashion buying at stores like those in the Ascena portfolio but going to “big box” stores to get commodity products at “a much cheaper price. So it was a really good ‘aha’ moment for us and we’ll certainly be thinking about how that impacts our business going forward,” Jaffe said.