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Lululemon Continues Battling Headwinds

Zacks Equity Research

Shares of Lululemon Athletica Inc. (LULU) tanked 18.7% since it posted its third quarter fiscal 2013 results on Dec 12, 2013.

Lululemon has been in troubled waters since Mar 2013 when the company was forced to recall its Black Luon yoga pants and crops from its stores and e-Commerce site due to quality related issues. This created a lot of buzz, which coupled with controversial comments from Lululemon’s founder that hurt the sentiments of its women customers, led to lower traffic trends in the company’s stores throughout 2013, thus, impacting the overall results.

Moreover, sales of Lululemon have been declining since the beginning of this year due to the impact of the polar vortex, which severely impacted regions with a significant number of Lululemon stores. This compelled management to trim its sales and earnings outlook for the fourth quarter of fiscal 2013.

The company now projects fourth-quarter revenues in the range of $513–$518 million compared to the previous forecast of $535–$540 million. Revenue forecast is based on constant-dollar comparable store sales (comps) decline in the low-to-mid single-digits range, against the prior projection of flat comps.

As a result, the company has lowered its earnings per share guidance to range from 71–73 cents a share, while it earlier anticipated earnings of $0.78–$0.80 per share. The current Zacks Consensus Estimate for the fourth quarter is pegged at 72 cents a share, falling within the company’s range.

Taking a cue from the company’s warning of weakened results in the upcoming fourth quarter, the Zacks Consensus Estimate for Lululemon has been witnessing a downtrend, as over the last 90 days estimates have declined 3.6% to $1.89 for fiscal 2014 and 11.6% to $2.20 for fiscal 2015.

Apart from these headwinds, the company is struggling to save its market share from competitors which are foraying into the activewear product line. Nevertheless, Lululemon is encouraged to see that the investments to strengthen and enhance its back-end product operations structure are starting to pay off. While the company believes that the full realization of these benefits is still a long way, it continues to stringently focus on the successful execution of its long-term strategic plans.

Lululemon currently holds a Zacks Rank #4 (Sell). Other better-ranked stocks in the same industry include Christopher & Banks Corp. (CBK), with a Zacks Rank #1 (Strong Buy), Belle International Holdings Ltd (BELLY) and H & M Hennes & Mauritz AB (publ) (HNNMY), both holding a Zacks Rank #2 (Buy).

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