Nov 15, 2013
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Lululemon shares slide on downgrade as gaffes, CEO search weigh

Nov 15, 2013

TORONTO, Canada - High-end yoga-wear retailer Lululemon's shares fell nearly 5 percent to its weakest level in a month on Thursday after an analyst downgraded the stock following fresh blows to the company's reputation as it hunts for a new chief executive officer.

The company, which recalled its popular black luon yoga pants in March because they were too see-through, recently faced new customer complaints that some products were too susceptible to pilling - the small, unsightly balls of fibers that form on fabric from wear and tear.

Source: Lululemon

In addition, Lululemon founder Chip Wilson raised a furor in a media interview last week when he said "some women's bodies just actually don't work" for the clothing, adding that "it's really about the rubbing through the thighs, how much pressure is there over a period of time.

Wilson said in a video message that he was "really sad" about the repercussions of his comments. But he did not retract his original statements.

"We have thought Lulu has been walking a tightrope for months, and now we believe it will fall off," Sterne Agee analyst, Sam Poser, wrote in a research note where he downgraded the company to "underperform" from neutral and lowered his 2014 estimates.

"The product problems, the lack of leadership, and the mouth of the chairman will likely continue to alienate existing customers, making it tough to attract new customers."

Lulu has been looking for a new chief executive officer since June, when Christine Day said she would step down.

This is not Wilson's first controversial comment. In a December 2004 profile in the National Post Business magazine, he said he chose the name "Lululemon" because L is not in the Japanese vocabulary.

"It's a tough pronunciation for them. So I thought, next time I have a company, I'll make a name with three Ls ... It's kind of exotic for them. I was playing with Ls and I came up with Lululemon. It's funny to watch them try to say it," he said in the article.


Lululemon turned a single store in Vancouver, British Columbia into a billion-dollar business in less than 15 years, carving out an exclusive niche selling high-quality, durable yoga clothing that loyal fans swear by.

Under Day's leadership, it consistently posted industry-leading sales-per-square-foot and same-store sales growth.

But Day surprised investors in June when she said she would step down as CEO as soon as a replacement was found. The search for someone who can both steer the company's growth ambitions and still fit in culturally has proved challenging.

"The lack of visibility on the next Chief Executive is likely weighing on sentiment," JP Morgan analyst Brian Tunick said in a report. "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."

Tunick, who expects a new CEO in place by April when Lululemon hosts analysts, initiated coverage on Wednesday with an "outperform" rating and a $84 stock price target on expectations growth will reaccelerate next year and beyond.

Lulu shares were dented at the end of October when Lulu named a Kmart executive as its new chief product officer and failed to offer news on a new CEO.

John Zolidis of The Buckingham Research Group who has an "underperform" rating, said he was cautious on Lulu, and noted in a recent client note that there was a good chance the market may be disappointed when the next CEO is announced. Zolidis did not believe that is accounted for in the stock price.

Lululemon, which reports third quarter results on December 12, has a price-to-earnings ratio of 28.3 versus the 18.3 median of its peers, according to Thomson Reuters data.

Thirteen out of 29 analysts have a "strong buy" or "buy" rating on Lulu, while 12 have a "hold" rating and four have a "sell" or a "strong sell."

The company's shares were down 4 percent at $66.23 on the Nasdaq in mid-afternoon trade, after falling as low as $65.72.

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