Lululemon sees tough second-quarter, shares tumble

TORONTO, (Reuters) - Lululemon Athletica Inc LULU.O cut its financial forecasts and warned that second-quarter sales were off to a weak start, sending shares of the struggling yogawear retailer down 15 percent even as it announced a new stock buyback program.

Chief Executive Laurent Potdevin said on a conference call that purchases were dropping even as customer traffic was picking up, blaming the decline in part on what he described as a "suboptimal" product assortment.

Fighting to win back customers and investors alike in the wake of an embarrassing recall of overly sheer yoga pants last year, Lululemon said it expects sales in established stores and online to decline in the low to mid-single digits in the second quarter, which started May 5.

Comparable sales edged up 1 percent in the first quarter, but the gain reflected an increase in online business. In established stores, sales dropped 4 percent.

"We have a core product assortment that has not been evolved as quickly as it should have been," Tara Poseley, Lululemon's new Chief Product Officer, also told the call. She said Lululemon did not offer enough seasonal products, as opposed to all-season "core" products, in the first quarter.

Potdevin admitted to investors earlier this year that Lululemon, which essentially created the lucrative yogawear market, was "not the only game in town anymore." Rivals like Gap Inc GPS.N, Under Armour UA.N, VF Corp VFC.N and even department stores are pushing fashionable workout gear.

Even as first-quarter earnings came in slightly ahead of expectations, Lululemon's latest forecasts reinforced the impression that the retailer is struggling to regain its stride in a more crowded compatitive landscape.

"The second quarter guidance is for a real deceleration from the already anemic first quarter," said Cowen and Co analyst Faye Landes.

Stifel analyst Jim Duffy cut the company to "hold" from "buy" after earnings, citing the disappointing forecasts.

In another blow, Lululemon said veteran Chief Financial Officer John Currie would retire by the end of the fiscal year. Currie, who said he wants to spend more time skiing, announced the news about a year after Chief Executive Christine Day announced her own exit after an extended slowdown in sales at a company that had regularly turned in double-digit growth.

The latest results came a day after Lululemon's founder and largest shareholder, Dennis "Chip" Wilson, announced he had voted against the reelection of the company's new chairman, who is a veteran director, as well as another board member. Wilson praised management, but said the board is too focused on short-term growth. (Full Story)

FALLING BEHIND

The company now expects revenue for the year to be in the range of $1.77 billion to $1.80 billion, with adjusted earnings of between $1.71 per share and $1.76 per share. It had earlier forecast earnings of $1.80 to $1.90 per share on revenue of $1.77 billion to $1.82 billion.

Analysts, on average, had expected full-year earnings of $1.89 a share on revenue of $1.8 billion, according to Thomson Reuters I/B/E/S.

Vancouver-based Lululemon's reputation for selling pricey but top quality yoga and running clothes was badly tarnished by last year's recall, which came after some customers noticed that their stretchy pants were partially transparent.

For more than a year, it has worked to smooth out quality and supply-chain issues, battle lawsuits, deal with departing executives and soothe customers after Wilson said in an interview that "some women's bodies just actually don't work" for Lulu's pants.

The retailer had previously said it would not fully resolve its supply chain issues until 2015.

Excluding a one-time adjustment for planned repatriation of foreign earnings, the company said its profit in the quarter was 34 cents a share. Analysts on average were expecting earnings of 32 cents a share.

On a net basis, profit in the fiscal first quarter ended May 4, fell to $19 million, or 13 cents per share, down from $47.3 million, or 32 cents per share, a year earlier.

Revenue rose 11 percent to $384.6 million, while sales at established stores and online sales edged up 1 percent from a year earlier. The company had forecast little change. The small gain came thanks to online sales, which rose 25 percent while comparable sales at corporate stores fell 4 percent.

The company said it could buy back up to $450 million worth of common shares over two years.

Shares fell 15.3 percent to $37.53 on the Nasdaq.

(Reporting by Euan Rocha and Allison Martell in Toronto and Shubhankar Chakravorty in Bangalore; Editing by Kirti Pandey, Sofina Mirza-Reid and Chizu Nomiyama)