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Lululemon Says Founder Feud and Product Woes Will Weigh on Sales for the Year
At a glance
- •Negative publicity around the founders public criticism and product quality complaints hurt customer traffic and sales.
- •Lululemon cut fullyear revenue guidance to $11.00$11.15 billion from a prior $11.35$11.50 billion range.
- •The company lowered its EPS guidance to $10.95$11.15 from $12.10$12.30.
- •Q1 results beat on samestore sales (+1%), EPS ($1.69) and revenue ($2.47 billion).
- •Founder Chip Wilson, with an ~8.7% stake, reached a settlement that will add two of his board nominees; another apparel director will be added by Oct. 1.
- •Heidi ONeill, a Nike veteran, will become CEO in September; analysts are watching how her experience translates amid competition and product repositioning.
- •Investors will focus on traffic recovery, how product fixes restore consumer confidence, and the pace of the companys strategic reset.
Lululemons turnaround hits turbulence
Lululemon Athleticas very public dispute with founder Chip Wilson, combined with quality complaints about new product lines, has knocked the companys momentum and forced management to trim its outlook for the full year.
Shares of Lululemon (LULU) plunged about 11% in after-hours trading on Thursday after the company cut its guidance, blaming both negative publicity and newer products that failed to connect with customers. The selloff extended a difficult stretch for the stock: Lululemon is down nearly 40% year to date.
Executive leadership put the fallout into blunt terms on the companys earnings call. Meghan Frank, interim coCEO and chief financial officer, said Lululemon experienced spikes of negative commentary in the media and on social channels with regard to our brand, and that the coverage depressed foot traffic and sales. These stories have died down and subsided, she added, but we have not yet seen a return to our predisruption trend.
The product problems center on the Get Low line of workout wear and other items that some customers and reviewers said were too sheer. The company also tried to expand its assortment with looser awayfrombody pants; while those drew some positive feedback, management said the items still underperformed and a marketing campaign around them did not produce a broad halo effect across the rest of the assortment. Color choices also constrained demand, the company said.
Lululemons founder, Chip Wilson who holds roughly an 8.7% stake and had been agitating for board changes publicly criticized the companys direction, saying it had lost its cool and completely lost its way. The company and Wilson reached a settlement last month in which Lululemon agreed to appoint two of Wilsons preferred nominees to the board after the annual meeting and to add another director with apparel expertise by Oct. 1.
Financials and guidance cut
Despite the headwinds, Lululemon reported a mixed first quarter. Samestore sales rose 1%, beating analysts consensus for a 0.2% decline. The company earned $1.69 a share, a penny above estimates, and revenue climbed 4% to $2.47 billion versus expectations near $2.43 billion.
But management narrowed its expectations for the full year. Lululemon now forecasts revenue of $11.00 billion to $11.15 billion, a range that implies flat to down 1% year over year. In March the company had been targeting $11.35 billion to $11.5 billion, which would have represented modest growth.
Lululemon also lowered its earnings per share outlook to $10.95$11.15, down from a prior range of $12.10$12.30.
The company has been trying to counter competitive pressure from lowerpriced rivals and performance brands such as Vuori, while also navigating mixed reactions to more fashiondriven items that some analysts say have taken it away from the technical workout wear that originally defined the brand.
Leadership changes are in motion: Heidi ONeill, a longtime Nike executive, is scheduled to become Lululemons CEO in September. Some analysts have raised questions about that hire because Nike itself has faced challenges, but Lululemon said the board additions and fresh leadership are part of a plan to steady the business and refocus on core product performance.
Management emphasized that the negative media cycles have lessened, and executives expressed confidence that product fixes and brand work will restore prior trends. For now, though, the combination of leadership uncertainty, product missteps and competitive forces has been costly enough to push the company to temper its fullyear outlook and weigh on shareholder returns.
Investors will watch how quickly traffic and conversion recover, whether new product iterations solve the seethrough complaints, and how the incoming CEO balances innovation with a return to technical product credibility. In the near term, those developments are likely to determine whether Lululemon can resume the growth trajectory that once made it one of retails most reliable performers.
