U.S. Markets closed

Lululemon shares sink on CEO departure

The Associated Press

Lululemon Athletica Inc.'s shares plunged Tuesday after the yoga clothing company announced the planned departure of its CEO, who is widely credited for helping build the brand's popularity.

THE SPARK: The Canadian company said after the market closed Monday that it is looking for a new CEO and its current chief executive, Christine Day, will step down when a successor is named. She held the job for more than five years, a period during which the retailer grew enormously.

THE BIG PICTURE: Lululemon gave little reason for the departure, but Day said in a statement that the time for a new CEO was right as the company has laid out its plan for the next five to 10 years. A new CEO, she said, could help lead the company into its next phase of growth.

The news came as the company reported a better-than-expected first quarter profit. It also comes in the wake of a rare misstep earlier this year, when it pulled some of its yoga pants off the shelves for being too sheer. The see-through snafu did little to hurt the company's financial performance or stock price though.

Shares were up more than 30 percent over the past year and hit their highest point since the company's 2007 debut on Monday before the announcement. But investors were spooked by the sudden CEO shakeup.

THE ANALYSIS: Sterne Agee analysts Sam Poser and Ben Shamsian downgraded their rating on the company to "Neutral" from "Buy," saying that the CEO resignation overshadowed an otherwise strong quarter and forecast for Lululemon. The analysts said the void in leadership potentially threatens the cultural health of the brand.

"We believe that the cultural cohesiveness that Ms. Day brought to LULU will be very difficult to replace," the analysts wrote in a research note, referring to the company using its Nasdaq Stock Market ticker.

The change in leadership is disruptive and adds to a list of management changes at the company, the Sterne analysts said. There are still three key positions that need to be filled: the senior vice presidents of product design and merchandise, logistics and of product and supply chain.

The analysts raised their estimates and said the 2013 guidance could prove conservative, but said the lack of information regarding the future leadership at the company is of great concern. The analysts also lowered their price target from $90 to $75.

UBS analyst Roxanne Meyer also downgraded her rating on Lululemon's stock to "Neutral" from "Buy." She said the departure was a tipping point following the recent loss of the chief product officer, quality control issues and other issues.

A representative for Lululemon declined to comment.

SHARE ACTION: Shares fell $13.50, or 16.4 percent, to $68.78 in midday trading, after earlier dropping as low as $67.96. The company's stock has been on a strong upward trend since 2009 and even with the day's decline, remains in the middle of its 52-week trading range of $52.20 to $82.50.