Analyst lowers Lululemon rating, price target

Analyst cuts Lululemon rating, price target a day after chief product officer steps down

Associated Press

NEW YORK (AP) -- An analyst lowered his rating and price target for Lululemon Athletica Inc. on Thursday, a day after the Canadian yoga wear maker announced that its chief product officer is stepping down.

On Wednesday Lululemon said that Sheree Waterson will leave effective April 15. The company said in a statement that the departure was part of a plan to reorganize its product team to support long-term growth. It wouldn't comment specifically if the departure was related to the problems it had with some of its pants being see through.

Late last month Lululemon pulled its Luon pants from store shelves because the fabric was too sheer. On Wednesday the company said that after evaluating its production issues, it found the problem stemmed from incomplete testing protocols combined with a style change in the pants pattern. Lululemon hired a new team, including senior level positions in quality, raw materials, and production, to look into the problem and oversee production of the Luon pants, which cost $72 to $98.

On Thursday Howard Tubin of RBC Capital Markets cut Lululemon to "Sector Perform" from "Outperform" and reduced its price target to $70 from $80.

In a client note, the analyst said that Waterson's departure "brings a new level of uncertainty to the Lululemon story." Tubin said that Waterson had been a strong creative asset for the company and felt she was instrumental in its design process for the past five years.

"We prefer to move to the sidelines with our rating until we have better visibility on future product direction," he wrote.

Tubin said that since Waterson led Lululemon's product organization, the Luon problem — along with other recent quality issues — were her responsibility in the end and likely contributed to her departure. The analyst believes the company will probably now split Waterson's role into two positions: one for design and one for production. Tubin said that this is the right move, but that it could take Lululemon some time to find someone appropriate for the design post.

The analyst said he still feels that Lululemon is an "exceptional and differentiated brand with significant growth prospects ahead."

A representative for Vancouver-based Lululemon could not be immediately reached for comment.

The company's stock added 77 cents to $65.01 in midday trading on Thursday. Shares are down nearly 15 percent in the year to date, while the broader markets have rallied.

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