Lululemon Drops After Profit Forecast Trails Estimates

Lululemon Athletica Inc. (LULU), a Vancouver-based yoga-wear retailer, declined the most in 10 months after projecting full-year earnings and sales that trailed analysts’ estimates.

Lululemon fell 8.8 percent to $63.84 at the close in New York, the biggest drop since Aug. 8. The shares had soared 50 percent this year before today.

Lululemon has more than doubled revenue in the past two years as its community-based marketing and stylish workout apparel attracted customers willing to pay premium prices for its products, such as $118 yoga pants. The company, which has added running gear and men’s clothing, is focusing more on innovation and creating new products for long-term growth at the expense of second- and third-quarter sales.

“This is not a demand issue but rather a deliberate strategy on the part of management to focus on long-term product innovation at the expense of chasing every dollar of unmet in- season demand,” Taposh Bari, an equity analyst at Jefferies & Co. in New York with a hold rating on the stock, wrote in a note today. “It may take the market one to two quarters to completely digest this latest development,” he wrote.

Full-year profit will be as much as $1.60 per share, the company said today in a statement. Analysts projected $1.63, the average of 24 estimates compiled by Bloomberg. Revenue for the year will total as much as $1.34 billion, trailing the $1.35 billion average of analysts’ estimates. In March, Lululemon had projected full-year profit of as much as $1.57 a share on sales of a maximum of $1.33 billion.

‘Impatient Market’

“It would be a uniquely aggressive management team in a slow-growth environment to get too aggressive in forward guidance, and I think that is a big part of the pullback in the stock today,” Mark Schultz, who manages the $260 million Wilmington Mid-Cap Growth Fund from Baltimore, said in a telephone interview. “Nothing we’ve seen in this quarter changes our investment thesis in the name,” said Schultz, who said his fund bought Lululemon shares in 2008.

Lululemon’s production team is focusing on “innovation versus chasing product,” Chief Executive Officer Christine Day said in an earnings call with analysts today.

In the past, Lululemon would divert the attentions of its product team and manufacturers by ordering products that had sold well in a previous quarters, reducing their ability to work on new fashions and products, and occasionally resulting in apparel that didn’t mix well with the latest items, Day has said.

‘Great Story’

While that shift may cap the company’s second-quarter sales, “we believe that management was attempting to say that they would not simply chase back into prior product that may not be ‘fresh,’” Adrienne Tennant, an analyst at Janney Montgomery Scott LLC with a buy rating on the stock, wrote in a note today. The company’s focus on offering unique and improved product for the higher-volume fourth-quarter will offer “more benefit and better return” for its efforts, she wrote.

Lululemon projected second-quarter sales of as much as $278 million, falling short of the average estimate for $289 million from a Bloomberg survey of 21 analysts.

“This is not a demand issue but rather a deliberate strategy on the part of management to focus on long-term product innovation at the expense of chasing every dollar of unmet in- season demand,” Taposh Bari, an equity analyst at Jefferies & Co. in New York with a hold rating on the stock, wrote in a note today. “It may take the market one to two quarters to completely digest this latest development,” he wrote.

Revenue of as much as $1.34 billion this fiscal year would compare with $1 billion in sales last year and $711.7 million in the prior period.

Earnings Growth

“We are trying not to overreact in the short term because, look, in this environment at the size we are, strong double digit comp growth, we think is a great story with a healthy margin,” Day said. “We really don’t feel the need to apologize for that level of performance and growth track record that we have.”

The company may be hurt by a slowdown in demand, said Edward Yruma, an analyst at Keybanc Capital Markets in New York.

“We do have some concerns that the U.S. luxury consumer may be slowing,” Yruma, who recommends holding the shares, wrote in a May 24 note to clients. “While we understand that the demand dynamics between high-end jewelry and activewear are not the same, we do believe that global economic issues do have a more profound impact on the affluent U.S. consumer.”

Shares Rallied

Lululemon shares rallied 36 percent last year and more than doubled in 2010, after ending 2009 at $15.05.

“What makes Lulu distinctive in the portfolio versus some of our other retail names is the extent to which it is disrupting and possibly redefining women’s athletic apparel and the brand extensions out of its core yoga,” Schultz said. “It’s the rippling out of the brand into related areas of the athletic apparel marketplace.”

First-quarter net income rose 40 percent to $46.6 million, or 32 cents a share, in the period ended April 29, from $33.4 million, or 23 cents, a year earlier, the company said today. That compares with the average analyst estimate of 30 cents, according to data compiled by Bloomberg. Revenue rose 53 percent to $285.7 million.

Same-store sales on a constant dollar basis in the first quarter advanced 25 percent, Lululemon said.

The company’s online sales more than doubled to $38.4 million in the first quarter from $13.7 million a year earlier, according to its quarterly filing today.

Lululemon had 180 stores in North America, Australia and New Zealand at the end of the quarter. The company got 60 percent of its revenue from the U.S. in the quarter, according to the filing.

To contact the reporter on this story: Sapna Maheshwari in New York at sapnam@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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