June 11 (Bloomberg) -- When Lululemon Athletica Inc. announced yesterday that Chief Executive Officer Christine Day was leaving the company, investors bolted.
Day, 51, had been a Wall Street darling. Sales have tripled in the past three years and the shares had risen more than fivefold since June 27, 2008, the day before she became CEO of the Canadian yogawear juggernaut. And while her reputation took a hit earlier this year when the Vancouver-based company was forced to recall pants that became transparent when wearers bent over, her announced departure caught many analysts by surprise.
“It’s certainly shocking, it’s a stunning announcement in no uncertain terms,” Camilo Lyon, a New York-based analyst for Canaccord Genuity Corp., said yesterday in an interview. “It’s perception that’s going to drive the stock, and the perception is going to be that there’s really no one that’s driving the strategic vision on a day-to-day basis.”
The shares fell the most in more than four years.
Day, who will stay on until a replacement is found, is leaving at a time of mounting challenges for Lululemon. Nike Inc., Gap Inc. and Under Armour Inc., attracted by the premium prices women will pay for quality activewear, are all piling in. To keep growing, Day was moving the brand into running and golf apparel while opening stores in Europe and Asia.
Though Lululemon’s stores are among the most productive in retail, that isn’t sustainable as the chain expands, John Zolidis, an analyst at Buckingham Research Group in New York, said in a note to clients yesterday. What’s more, the company may have to cut prices as competition increases or fashions change, he said.
“This was a personal decision of mine,” Day said on a conference call after the company reported earnings. “It’s never the perfect time to leave a company you love.”
“The timing’s right to bring in a new person to lead,” she also said.
Lululemon was founded by entrepreneur Chip Wilson in 1998 after he took a yoga class and found clothing then available wasn’t ideal for yoga.
With a canny blend of fashion and lifestyle marketing -- along with offering free yoga classes, it spotlights local “ambassadors” who “embody the Lululemon lifestyle” -- the retailer has built a cult-like following since moving into the U.S. in 2003.
Day joined Lululemon in January 2008 as executive vice president of retail operations after 20 years at Starbucks Corp., where latterly she led the coffee chain’s Asia operations.
When Day took charge, Lululemon had 87 stores worldwide. Today, with the chain pushing into Asia and Europe, it has 218. In 2009, the brand started an online store. In the first quarter, Lululemon generated 15.6 percent of sales on the Web, an increase of 40 percent from the same period a year earlier.
Along the way she won a reputation for delegating authority to the leaders on her team, encouraging collaboration and creativity from design to merchandising.
Then trouble hit with the see-through pants debacle. Lululemon in March said it was recalling certain shipments of black Luon pants, which accounted for about 17 percent of all women’s pants it sells, and cut its sales forecast for its fiscal first quarter.
Two weeks later, the company announced that Chief Product Officer Sheree Waterson would be stepping down. Lululemon said that while the defective pants had met its testing standards, those protocols were incomplete and didn’t adequately examine all the variables in the fabric’s characteristics.
As the company phases the pants back in and implements the new quality controls, some analysts suggest the error may have been the product of zealous growth that is ultimately unsustainable. Zolidis wrote in a note that the company’s execution problem showed the company has strained its infrastructure as it accelerated growth.
“Over time, we expect sales growth to slow and operating margins to contract due to factors including maturation in Canada, pressure from new stores in the U.S., and increased competition,” wrote Zolidis, who has the equivalent of a sell rating on the shares. “Longer-term, fashion and entry into international markets are also risks.”
Lululemon said comparable-store sales increased 7 percent in the first quarter and forecast same-store sales would grow 5 percent to 7 percent in the second quarter, citing the “soft launch” of black Luon pants into stores and online. That growth compares to a 15 percent gain in the second quarter a year ago. Comparable-store sales in Canada were “somewhat negative” this quarter, Chief Financial Officer John Currie said on the call.
Currie also said some spring styles didn’t sell as well as expected, forcing Lululemon to mark down about 15 percent of its product compared with its usual 10 percent to 12 percent.
Lululemon said yesterday that net income for the quarter ended May 5 rose 1.4 percent to $47.3 million, or 32 cents a share, from $46.6 million, or 32 cents, a year earlier, the company said in the statement. Analysts projected 30 cents, the average of 25 estimates compiled by Bloomberg. Sales rose 21 percent to $345.8 million.
Lululemon is preparing to open stores in London next year and add showrooms in China, Day said on the conference call. The company has already introduced showrooms in Germany and Singapore to test the markets as it focuses on Europe and Asia.
At the same time, Lululemon is adding apparel for new sports to its stores, introducing golf and tennis this spring. Day said the new lines have received “terrific” feedback, with polo shirts selling out online in less than 48 hours.
Lululemon’s attempts to diversify come amid rising competition. Gap’s Athleta is borrowing from its rival’s playbook, hooking up with local yoga instructors and has sponsored classes such as Mommy & Me Yoga. Like Lululemon, Athleta has trained staff to make garment recommendations tailored to customers’ pursuits -- a half-marathon, say, or paddle boarding.
Although Athleta is much smaller than Lululemon, with a total 35 stores as of Feb. 2, Gap plans to add 30 locations in 2013, Gap Chief Executive Officer Glenn Murphy said in February. The stores are often located near Lululemon locations and offer similar products, often at a lower price.
Under Armour also is looking for a larger piece of the women’s activewear market. In February, it opened a test store in Baltimore to appeal more directly to women, adding natural light and softer colors. Like Lululemon, Under Armour is advertising the apparel as sport- and street-appropriate. The company plans to open a second location this year.
The shares fell 18 percent to $67.85 for the biggest decline since December 2008. The shares have fallen 11 percent this year, compared with a 14 percent rise in the Standard & Poor’s 500 Index.
“Ms. Day’s departure, along with the recent departure of the chief product officer, continues to bring a new level of uncertainty to the LULU story,” Howard Tubin, an analyst with RBC Capital Markets in New York, wrote in a note to clients.
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