The fundamentals of Lululemon Athletica inc.(NASDAQ:LULU) (TSE:LLL) have declined from bad to worse as the apparel retailer slashed its fourth quarter outlook triggering a selling spree that wiped off more than $1.4 billion in market cap. The company has more near-term risks that may further dent the confidence of investors.
Shares lost as much as $10.6, or about 18 percent, to touch a new 52-week low of $49, a drop of more than 40 percent from its June 2013 high of $82.50.
Based in Vancouver, lululemon athletica, a yoga-inspired athletic apparel company. lululemon athletica operates company-owned stores in the US, Canada, and Australia. The company, which was founded in 1998, opened its first store in Vancouver in 2000 and went public in July 2007. The company operates two concepts - lululemon and ivivva.
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Though the company had already warned about the fourth quarter in December saying that it would be impacted by macro and execution issues, investors weren't expecting a guidance cut. Moreover, the original quarterly guidance itself was below Street view.
For the fourth quarter, the company now sees revenue of $513 million to $518 million based on comparable-store sales in the negative low-to-mid single digits on a constant-dollar basis. Earlier, the company estimated revenue in the range of $535 million to $540 million based on flat comparable-store sales on a constant-dollar basis.
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Lululemon also trimmed its fourth quarter profit view to 71 to 73 cents a share from 78 to 80 cents a share. Wall Street expects earnings of 79 cents a share on revenue of $541.32 million, according to analysts polled by Thomson Reuters.
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The company's traffic and sales trends have decelerated meaningfully since the beginning of January, and these weaker trends are expected to continue through the remainder of January.
While the CEO overhang is behind investors, there is only limited margin expansion as investment in the business, continued resolution of sourcing issues, and increased business complexity are near-term risk factors.
Further, comps will get tougher as the quarter progresses. The company's comps may be weighed down due to lingering sourcing/quality issues and the traffic not rebounding sharply. There will also be continued pressure from SG&A from investments in the business.
This shows that the company is finding difficult to sell its higher margin core product and could be a sign that new customer adoption is slowing. Gross margins were pressured during the third quarter and fell to 53.9 percent from 55.4 percent a year-ago. The lower mix of high-margin black Luon bottoms and higher inventory reserves are to blame.
Another reason to worry is the 33 percent sequential increase in inventories, outpacing sales growth. The only solace here is these inventory balances seem to represent roughly three months of total sales.
In addition, competitors Nike Inc. (NYSE: NKE) and Under Armour Inc. (NYSE: UA) are making the environment more difficult for Lululemon, which is yet to recover from its own mistakes, such as the infamous see-through yoga pants.
Meanwhile, the company is running behind the curve on building the necessary sourcing infrastructure with a long list of open positions on the product side for the last two years.
The company has been focused on reorganizing the team (recent new hires include a SVP of Product Operations and a SVP of Logistics & Distribution), improving efficiencies, having a more disciplined product calendar, constructing an R&D center at headquarters, and improving communication with factories starting at the beginning of the process.
LULU has certain key longer-term drivers including Men's and international growth. Men's is currently 12 percent of sales, but is expected to be able to support standalone stores starting in fiscal 2016. The Men's team has grown to 40 people.
However, time is running out for LULU. All these reorganization efforts will take time to show results and investors have lost patience with the stock, which have fallen 17 percent in the last one year. The stock is also expensive trading at 21 times its forward earnings.
Lululemon is expected to report its fourth-quarter financial results in late March. If things go like this, investors shouldn't surprise if the company churns out a weak performance.
As such, the stock may not be suitable for near and medium-term investors. But, those who are in the longer-term horizon can consider the stock as all is not lost at LULU. Strong brand positioning and international expansion make it suitable for a long-term bet.
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