Lululemon dives on risks of prolonged turnaround under new CEO

Sept 4 — Lululemon Athletica shares tumbled 18% to an eight-year low on Friday as the sportswear maker's latest annual forecast ​cut fanned worries of a long-drawn-out overhaul under incoming CEO Heidi O'Neill.

O'Neill, a former Nike executive, will take charge on September 8 when the once athleisure darling's latest efforts to reignite growth through new styles and assortments ‌have failed to resonate with style-savvy customers.

Lululemon, associated by its affluent female shoppers with sophisticated leggings and yoga pants, has faced stumbles in product innovation, as well ⁠as concerns over fit and design in earlier launches.

"Lulu is ​a powerful brand but an overstretched one," Guggenheim analyst Simeon ⁠Siegel said.

Sales of Lululemon's leggings declined about 20% in the second quarter, while its share of the athleisure market shrank 10 ‌percentage points to 43.9% in August, ‌according to data from M Science. Meanwhile, shares of newer rivals Alo and Vuori grew 5.9 percentage ⁠points and 2.2 percentage points, respectively.

Lululemon's shares were trading at about $100, near their ⁠May 2018 levels. If losses hold, the slump would erase about $2.5 billion in market value and extend the stock's decline this year to about 52%.

TOUGH ROAD TO RECOVERY

"The rot has now set quite deeply in Lululemon and the market is very competitive, so this is not going to be an overnight turnaround," said Neil Saunders, managing director of GlobalData.

Leggings, the Canadian sportswear maker's signature product that fueled its growth, have lost traction as customers shift to looser-fitting bottoms.

Executives on ‌a post-earnings call acknowledged the challenge.

"We remain committed to the category (leggings), but there are ​shifts occurring with guests looking for away from body silhouettes," interim CEO Meghan Frank said on Thursday.

A few recalls and issues with product design have also forced customers to move away from Lululemon's leggings. In January, the company briefly pulled the $108 "Get Low" leggings from its website after customers complained that the product was see-through.

"We could see multi-quarter and even multi-year declines as the consumer moves away from leggings," BNP Paribas Equity Research senior analyst Laurent Vasilescu said.

At least 12 brokerages lowered their price targets on the stock, with analysts arguing the company still operates a cost structure built for growth ​despite declining sales, with store square footage up 11% in the second quarter.

"I think the store expansion will slow down," Morningstar analyst David Swartz said, adding ‌that cost cuts, ‌management changes and a ⁠possible operational "realignment" can be expected.

LEANING ON NIKE EXPERIENCE

O'Neill's tenure at Nike, where she is credited with growing the women's apparel business, could assist Lululemon's efforts to win back core customers from rivals with fresher and more relevant merchandise.

O'Neill was heavily involved in product development in the women's athleisure space, Morningstar's Swartz said, so she has a lot of relevant experience.

Meanwhile, Lululemon's $1.4 billion in cash and equivalents ‌at the end of the second ​quarter could be a key advantage as the company seeks a turnaround.

Lululemon's ‌shares were trading at about 11.50 ⁠times forward earnings, compared ​with 20.76 for peers Nike and 13.41 for Adidas.

(Reporting by Juveria Tabassum, Kanishka Ajmera and Neil J Kanatt in Bengaluru; Editing by Jonathan Ananda ​and Sriraj Kalluvila)

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