Lululemon CEO Eyes Holidays After Sales Miss

Lululemon Athletica Inc. (LULU) Chief Executive Officer Christine Day was unapologetic after projections for second-quarter sales missed analysts’ estimates, sparking the biggest stock decline in 10 months.

Day cited “strong double-digit” growth in same-store sales and said the company was focused on innovation that will position the Vancouver-based yoga clothier for a strong year-end holiday season.

“We really don’t feel the need to apologize for that level of performance and growth track record that we have,” Day, 50, said on a conference call.

Lululemon shares rose 1.5 percent to $64.77 at the close in New York, paring its two-day loss to 7.5 percent. They’ve advanced 54 percent in the past 12 months, compared with 3.6 percent for the Standard & Poor’s 500 Index. The company also doubled revenue to $1 billion in the past two years as shoppers showed themselves willing to pay premium prices for stylish workout gear, including $118 yoga pants.

Still, the retailer may face weaker demand as economic growth slows in the U.S. and Canada, which account for more than 90 percent of Lululemon’s sales. Canada’s economy added just 5,000 jobs last month, Statistics Canada will probably say today. The economy grew at a 1.9 percent annualized pace between January and March, as consumer spending grew at the slowest pace in three years. Federal Reserve Chairman Ben S. Bernanke said yesterday that the situation in Europe “poses significant risks” to the U.S. economy.

The company, which has added running gear and men’s clothing and expanded its ivivva athletica brand, may be susceptible to fewer purchases by affluent customers, said Edward Yruma, an analyst at Keybanc Capital Markets in New York.

Luxury Consumer

“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.”

Full-year profit will be as much as $1.60 per share, the company said yesterday 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.

“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,” 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, whose fund bought Lululemon shares in 2008.

Inventory Rises

Lululemon boosted inventory to $107.7 million in the quarter from $64.4 million a year earlier.

Lululemon’s production team is focusing on “innovation versus chasing product,” Day said in the earnings call.

In the past, Lululemon would divert the attentions of its product team and manufacturers by ordering products that had sold well in 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.

“They’re very cognizant of the potential to disrupt their factories to chase sales in the second and third quarter at the expense of their fourth quarter,” said Sharon Zackfia, an analyst at William Blair & Co. in Chicago, with an outperform rating on the stock. “It’s still a relatively young company and sometimes these choices have to be made.”

Earnings Growth

Lululemon’s stock trades at a price-to-earnings ratio of 40, compared with the average 17.5 for the S&P 500 Retailing Index, 15.7 for Gap Inc., which owns rival Athleta, and 15.2 for Limited Brands Inc., which is also expanding into women’s athletic apparel, according to data compiled by Bloomberg.

“The earnings growth versus valuation disparity that has existed is likely to converge, and we expect that stock appreciation from today’s corrected levels may be more measured and more in line with actual earnings growth prospects,” Adrienne Tennant, an analyst at Janney Montgomery Scott LLC, wrote in a note. Tennant, who has a buy rating, anticipates 30 percent earnings growth for the company for the next several years, she wrote.

Lululemon’s revenue has grown at an annual rate of 42 percent over the past three years, second among 58 retailers with a market value of $1 billion or more, according to data compiled by Bloomberg.

Strong Christmas

“They had three incredibly strong Christmases in a row, and they’re very focused on having another really, really strong Christmas,” Zackfia said.

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. 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.

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.

Lululemon’s management “has impressed us with a thoughtful approach to building the brand and building the franchise,” said Schultz. “It is possibly seductive in the short-term but dangerous in the long-term to part from disciplined product strategy.”

To contact the reporter on this story: Sapna Maheshwari in New York at

To contact the editor responsible for this story: Robin Ajello at

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