When Lululemon Athletica stock rose to an all-time high of nearly $80 per share in 2012, the yogawear enterprise was an apparel industry Cinderella story.
However, that fairytale turned into a nightmare earlier this month when the company reported a 59.9% plunge in Q1 net earnings due to a tax liability, and a share price decline of almost 16 percent. The tax payment was owed on funds retrieved from Lululemon’s foreign operations. The remaining cash, about $450 million, will be used to buy back company common stock to boost share price.
The Vancouver, Canada-based company is said to be struggling with additional problems, including adapting to consumers’ ever-changing tastes and price resistance. Consequently, investors and analysts are pessimistic about Lululemon’s short-term prospects.
It is an unexpected twist in the tale which began in 1998 when Dennis “Chip” Wilson, a yoga enthusiast himself, founded the Lululemon brand. Intended to be a “community hub” with in-store events and wellness workshops, the brand’s earliest adopters were yoga instructors. The company sought their feedback and critique to help develop its product line.
Slow but steady growth ensued under Wilson’s executive leadership. Wilson, who had previously founded another apparel firm, Westbeach Snowboard Ltd., specializing in gear for the surf, skate and snowboard markets, currently holds a 28 percent stake in Lululemon, and is the firm’s largest shareholder.
In 2009 Lululemon’s exponential growth began to take shape. The company’s high-quality, functional apparel made of technical fabrics–primarily sourced from Bangladesh, China and Vietnam–began to garner a loyal following of yogis and runners alike. Coupled with a simultaneously growing number of consumers seeking activewear, the brand picked up steam.
From 2009 to 2012 the firm’s stock price soared from $3 a share to its historical $80 high and revenue nearly tripled during that three year period. Gross margins were better than 50 percent annually since 2003, and helped propel the firm’s profitability.
The name Lululemon became synonymous with yoga apparel which sold at aspirational prices (pants for nearly $100), and became a status symbol for gym-goers. By February 2014, the firm was operating 254 stores in the U.S., Canada, Australia and New Zealand under the brands Lululemon Athletica and Ivivva Athletica, its range of girls’ activewear.
However, recent store sales have been down, partly because of aggressive competition from its less expensive rivals. Activewear and yoga gear brands such as Gap Inc.’s Athleta, Nike and Under Armour, among others, have cut into Lululemon’s market share. According to a recent Wells Fargo survey of 1,000 women age 15 to 60, 84 percent said athletic wear was priced too high. As a result, customers are looking for value buys.
Additionally, analysts cited Lululemon’s lack of new products and slowing mall traffic as contributors to the company’s problems. Fashion trends are causing a shift away from the brand’s simple aesthetic and signature solid colors toward more intense hues and patterns, and online shopping is making it easier for consumers to stay at home and comparison shop.
Lululemon’s troubles accelerated last year when one of its best-selling yoga pants was recalled because the material was too sheer. The sub-standard inventory was subsequently destroyed at a reported cost of $67 million to the company. Three months after the gaffe, then-CEO Christine Day resigned.
In Lululemon’s boardroom, turmoil continues to brew. Earlier this month, founder Wilson voted against the firm’s new chairman, Michael Casey, and against another outside board director who was up for re-election. Although Wilson gave up his board chairmanship in May, his vote against Casey may indicate he will continue to orchestrate, at least in part, the company strategy.
Meanwhile Laurent Potdevin continues as CEO, a post he assumed in January. Despite Lululemon’s current turbulence and a downward revised outlook for revenue and earnings per share for the entire year, recent company statements were nevertheless optimistic about its ability to increase shareholder value.
“By leveraging its design-led roots, strengthening its supply chain and providing an exceptional guest experience, we are confident that lululemon, under new CEO Laurent Potdevin’s leadership, will provide guests with the high-quality, technical products they know and love and create value for shareholders,” according to a company statement.
However, the bickering has carried on. Just prior to this month’s annual Lululemon board meeting, Wilson issued a press release which said the board is “…heavily weighted toward short-term results at the expense of product, culture and brand and longer term corporate goals.”
In response to Wilson’s statement, Lululemon said, “Contrary to Mr. Wilson’s assertions, Lululemon’s board members are aligned with the company’s core values and possess the necessary expertise to successfully lead Lululemon forward.”
According to the Wall Street Journal, Wilson is working with bankers at Goldman Sachs as he considers options for restructuring the company’s board and gaining more influence over operations. Unnamed sources familiar with the situation said Wilson could launch a proxy fight to win more board seats, or partner with a private equity firm for a buyout, WSJ reported.
Lululemon’s future plans include adding more casual apparel lines, offering more menswear and pursuing international growth. The firm recently opened a store in London, its first post in Europe. And in practice the company previously resisted under CEO Day’s leadership, Lululemon will begin to collect customer data to track buying habits.
Whether Lululemon’s stock buy-back program, expansion plans or its development of a customer data base results in a company turnaround remains to be seen. However, with its new agenda and $450 million earmarked for buying back company stock, Lululemon’s share price could begin inching up. The stock opened Monday at $41.74, up from its three-year low of $37.25 earlier this month.
But this year’s outlook for the company is not promising. Forecasting total annual earnings for 2014, Lululemon said earnings per share could range from $1.71 to $1.76, not counting its one-time tax liability. The new forecast represents a downward revision from its previous forecast of $1.80 to $1.90 earnings per share.