TORONTO - Lululemon Athletica Inc.'s unexpected lowering of its fourth-quarter profit outlook sent its stock tumbling Monday and raised questions about how long the yoga fashion retailer's problems will last.
Chief financial officer John Currie said Monday that the company was on track to deliver on its sales and earnings guidance through December, but had seen traffic and sales trends "decelerate meaningfully" since the beginning of January.
"As we end 2013, we are starting to see the results of the significant investments we made throughout this past year to strengthen and enhance our back-of-house product operations structure," Currie said.
"While we realize that it will require continued investment and time to get to best-in-class status, with our new leadership in place we are very focused on building on this stronger foundation to execute our long-term growth strategies."
But analysts questioned the Vancouver-based company's (Nasdaq:LULU) future amid guidance revisions that, as Cowen and Co. analyst Faye Landes put it, are "starting to feel like a chronic injury."
"To say that these are weak results would be an understatement," she said in a note to clients as she downgraded the stock from outperform to market perform.
"We are losing count of the number of intraquarter guidedowns that the company has had in the past year plus, which is not what we, or anyone else, wants to see in what is ostensibly a growth stock."
John Zolidis, an analyst with The Buckingham Research Group, reiterated his underperformance rating, noting that "we are closer to the beginning of problems for Lulu than their resolution."
"Revised guidance implies sales 'fell off the cliff' in January," he said in a note to clients, adding that while many investors credit former CEO Christine Day with Lululemon's success, she has done a poor job of setting up her successor.
"Experience suggests this will not be an easy fix," Zolidis said.
"Lulu enjoyed several years of extremely strong growth as a faddish demand for its product produced record setting levels of sales productivity and the highest ever operating margins we've seen for a specialty apparel retailer. Those days are now behind the company (and Lululemon) has never operated in an environment of declining sales demand."
Lululemon isn't the only retailer facing headwinds as American shoppers deal with an uncertain economic recovery and more U.S. giants, such as Target, move into what's already a competitive retail space in Canada and put pressure on pricing.
But the company has suffered some specific setbacks of late — including its handling of a problem with its black Luon pants, the fabric of which was sometimes so thin, the pants were see-through.
Lululemon said the problems were due to a style change and production issues and moved to fix them, but new complaints emerged later about the quality and durability of the pricey workout gear.
Day, who had been seen as a key part of Lululemon's recent success, announced in the summer she would leave. On Dec. 10, the company hired Laurent Potdevin as her successor and said Lululemon founder Chip Wilson would step aside as chairman of the board but remain a director of the company.
Wilson ignited a public relations crisis for the company in November by suggesting to Bloomberg TV that Lululemon's yoga pants don't work well for some women.
His comments about "the rubbing through the thighs" and "how much pressure is there'' when some women wear Lululemon pants led critics to accuse Wilson of shaming women's bodies. He later posted a video message online taking responsibility "for all that has occurred.''
In December, the retailer warned of a tough holiday season as it worked to win back customers after those missteps, and said same-store sales for the key holiday period would likely be nearly flat even as it reported improved third-quarter earnings.
"This was a company and a stock that could do no wrong for so long and it’s a good reminder for investors that even the most pristine of stories in the stock markets can lose a bit of lustre over time," said Craig Fehr, Canadian markets specialist at Edward Jones in St. Louis.
"When you’re in the consumer space, you not only have to fight the financial issues, you also have to fight the public persona, the PR issues," he said.
"It’s a pretty big storm for them. Not to say they can’t weather it, but they are certainly up against a lot of scrutiny from the investment community."
Despite Lululemon's troubles, analysts had been expecting the company's actual results to be slightly above the previous guidance on revenue and earnings, estimating 79 cents per share of adjusted earnings and US$542.4 million of revenue, according to Thomson Reuters.
In its revised guidance Monday, Lululemon said it now expects its revenue and profit for the fourth quarter ending Feb. 2 will be significantly lower than its previous estimate before Christmas.
Lululemon's new revenue range is between US$513 million and US$518 million, about $22 million lower than the previous guidance. The company's new estimate for diluted earnings per share is between 71 and 73 cents per share, a reduction of seven cents.
Lululemon shares were down $9.83 or 16.5 per cent at US$49.77 on the Nasdaq market.
The stock also dropped dramatically on Dec. 12 after its previous guidance announcement was below expectations. Lululemon said at that time that it was expecting between US$535 million and US$540 million of revenue and earnings of between 78 and 80 cents US.
Prior to the December guidance for the fourth quarter, which spans the important Christmas and new year shopping period, Lululemon shares had been trading above $65 per share for most of 2013 and usually between US$70 and US$75 per share.
RBC Capital Markets analyst Howard Tubin noted Monday that the guidance would lead to the first negative same-store sales for the company since the second quarter of 2009 if it plays out.
Note to readers: This is a corrected story. It clarifies that the drop in sales has been in January, since the end of December.
JCPenney has probably made more operational and strategic mistakes than any other large publicly traded company in America. Penney hired Apple’s retail chief Ron Johnson in November 2011 to replace longtime CEO Mike Ullman. Johnson implemented a series of marketing and merchandising strategies that not only failed to boost revenue but actually hurt sales — same-store sales and revenue fell roughly 25% in fiscal 2012. Same store sales failed to meet modest expectations in 2013. The company then rehired Ullman as CEO in April 2013, despite his poor performance before Johnson joined. Since returning, Ullman has announced plans to reverse most of Johnson’s changes. Because of its sales failures and poor balance sheet, Penney is considered by many to be teetering on the brink of bankruptcy. The stock market has ravaged the stock, pushing down shares by 60% over the last five years. JC Penney has also done poorly in the critical e-commerce sector. In the Foresee study of online retail customer satisfaction, Penney scored well down the list, a sign that it has an uphill battle to get consumers back. <a href="http://247wallst.com/special-report/2014/01/10/the-10-most-hated-companies-in-america-3/#ixzz2q86Fju5j" target="_blank">Read more at 24/7 Wall St.</a>
The long and tragic decline of BlackBerry is a good example of how quickly a market leader can go astray. The grandfather of the smartphone industry has lost almost all of its market share to current leaders Apple and Samsung. As recently as 2008 the company was one of the largest sellers of smartphones in the world, with total unit sales more than double those of Apple. Since then, however, the company’s share of the mobile phone market has evaporated. BlackBerry shares dropped by nearly 30% over the past year, while the S&P 500 gained more than 25%. Revenue in the third quarter was approximately $1.2 billion, down 56% from the year before. The company recorded revenue from 1.9 million smartphones in the period, compared to 6.9 million in the same quarter of the previous year, and the company lost $4.4 billion in the quarter. In contrast, Apple sold 33.8 million iPhones in its last reported quarter. BlackBerry launched two new phones last year in a last-ditch effort to field a competitive product. Unfortunately, consumers ignored the Z10 and Q10, prompting the company to announce it was cutting one-third of its staff and taking an inventory write-down of roughly $960 million in its fiscal second quarter. <a href="http://247wallst.com/special-report/2014/01/10/the-10-most-hated-companies-in-america-3/#ixzz2q86Fju5j" target="_blank">Read more at 24/7 Wall St.</a>
lululemon was once one of the world’s most-promising retail companies. However, it has fallen on hard times. Shares are down nearly 20% in the past 12 months, compared with the S&P 500’s 25% increase. lululemon was once the only game in town for yoga wear, clothing that has become extremely popular in the last few years. But larger clothing brands have begun eating away at the company’s market share. Shares are down more than 15% since the company cut its outlook for the fourth quarter and fiscal year in mid-December. The company was embroiled in several public relations fiascos last year. After customers began complaining that one style of the company’s pants were see-through in certain conditions, lululemon issued a recall. The problems might have ended there had the company’s Chairman Chip Wilson not mentioned on television that the pants might not work on women of all sizes. In the ensuing fallout, Wilson resigned. <a href="http://247wallst.com/special-report/2014/01/10/the-10-most-hated-companies-in-america-3/#ixzz2q86Fju5j" target="_blank">Read more at 24/7 Wall St.</a>
7. JPMorgan Chase
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Like McDonald’s, Walmart (NYSE: WMT) bore the brunt of the labor protests around raising the minimum wage last year. The company employs more workers who make less than $10 per hour than any company in America, according to an analysis by 24/7 Wall St in collaboration with NELP. While the company reports that its U.S. workers make an average of $12.81 an hour, this does not include part-time hourly wages. According to Glassdoor, Walmart sales associates, who are often part-time hourly employees, earn less than $9.00 an hour, on average. Further, only half of the store’s employees approve of the CEO. Customers were less satisfied with service at Walmart in 2012 than at any competing chain. Possibly as part of an effort to stem employee dissatisfaction and deflect negative media attention, the world’s largest retailer promoted 35,000 part-time workers to full-time status. Comparable sales at Walmart’s U.S. stores declined 0.3% in the third quarter. Also, company shares have underperformed the S&P 500 during the past year. <a href="http://247wallst.com/special-report/2014/01/10/the-10-most-hated-companies-in-america-3/#ixzz2q86Fju5j" target="_blank">Read more at 24/7 Wall St.</a>
5. DISH Network
Subscribers aren’t impressed with DISH’s (NASDAQ: DISH) customer service. DISH earned a spot in MSN’s 2013 Customer Service Hall of Shame largely because of its aggressive sales tactics. Customers also complained about confusing contracts and unreasonable cancellation fees. DISH is not the only company in the industry that customers despise, however, it reaps additional notoriety because of its relationship with its employees. Based on a 24/7 Wall St. analysis of Glassdoor data, DISH was rated as the worst company to work for last year. Chairman Charles Ergen holds a controlling interest in the company. GMI Ratings, which rates corporate governance on publicly traded companies, warned that his personal investments might present a conflict of interest with DISH shareholders. A GMI Ratings analyst cautioned that “These are things to be concerned about because they raise reasonable questions about conflicts of interest and the overall integrity of governance at the company.” Shareholders, on the other hand, have reason to be happy: DISH’s stock is up more than 50% in the last year, and more than 325% in the past five years. <a href="http://247wallst.com/special-report/2014/01/10/the-10-most-hated-companies-in-america-3/#ixzz2q86Fju5j" target="_blank">Read more at 24/7 Wall St.</a>
4. Sears Holdings
Sears Holdings (NASDAQ: SHLD) is the parent corporation of retailers Sears and Kmart — both notorious underperformers. Investors have lost trust in controlling shareholder and chairman Eddie Lampert, whose poor management and decision-making has caused the company to shrink. Only 17% of the company’s workers approved of Lampert’s performance, according to Glassdoor. Sears was also ranked among the worst companies to work for last year, according to an analysis of Glassdoor data by 24/7 Wall St. Employees rated it a 2.5 out of 5, among the lowest marks awarded to a company of that size. This may be why the ACSI gave Sears a lower customer service score than every retailer in the industry, except for Walmart. In the third quarter of 2013, Sears Holdings posted a net loss of $534 million compared to a loss of $498 million in the same period the year earlier. More recently, comparable store sales fell by 7.4%, the result of a 5.7% decline at Kmart and a 9.2% decrease at U.S. Sears stores. As is the case at many of the country’s largest retailers, Sears and Kmart are among the largest employers of low-wage workers in the country, according to analysis by 24/7 Wall St. in collaboration with NELP. <a href="http://247wallst.com/special-report/2014/01/10/the-10-most-hated-companies-in-america-3/#ixzz2q86Fju5j" target="_blank">Read more at 24/7 Wall St.</a>
3. Electronic Arts
Leading game maker EA (NASDAQ: EA) has recently hit some serious roadblocks. The company’s highly anticipated SimCity reboot was by all accounts a public relations disaster. The game servers failed to function for nearly a week after the launch, which meant consumers couldn’t play the game for a week after they purchased it. The company eventually offered a free game to anyone who had purchased SimCity in the early days. One of the free games offered was Mass Effect 3, another release that tarnished the company’s brand. Critics and gamers widely criticized the ending of the third installment of this very successful game as unsatisfying. The backlash was so severe that the company eventually released a free alternate ending. And there may be more troubles ahead. EA is having problems with yet another bug-filled launch, the fourth installment of the Battlefield franchise. On top of this, investors are suing the company for allegedly making misleading statements about the game’s launch and overstating its success. It’s perhaps not surprising then that, once again, The Consumerist labeled EA the “Worst Company in America” last year — the first company ever to earn the dubious distinction two years in a row. In March, EA CEO John Riccitiello resigned. While company shares have performed relatively well, there is recent cause for concern. Last quarter, the company reported a loss of $273 million. <a href="http://247wallst.com/special-report/2014/01/10/the-10-most-hated-companies-in-america-3/#ixzz2q86Fju5j" target="_blank">Read more at 24/7 Wall St.</a>
2. Abercrombie & Fitch
Long-time Abercrombie & Fitch (NYSE: ANF) CEO Michael Jeffries is often referred to as the “modern founder” of the decades-old clothing line. But he became the subject of controversy when comments he made in 2006 about who the company wishes to see as its core customers recently surfaced. The comments implied that the teen retailer is looking to attract what he refers to as the “cool kids” and aims to avoid overweight customers. Still, he has the backing of the board. In response to an attempt by activist shareholder group Engaged Capital to force him out, the board gave Jefferies a new contract. But the investment firm may have good grounds for dissatisfaction. Jeffries has made $79 million over the last three years. Meanwhile, the company’s stock has underperformed the S&P 500 in the last five and is down 30% in the past year. Investors have punished the stock as revenue and earnings have declined. In its last reported quarter, Abercrombie announced that revenue dropped to $1.03 billion from $1.17 billion the year before. The company had a net loss of $15.6 million compared to a profit of $84 million in the same period the year before. <a href="http://247wallst.com/special-report/2014/01/10/the-10-most-hated-companies-in-america-3/#ixzz2q86Fju5j" target="_blank">Read more at 24/7 Wall St.</a>
McDonald’s (NYSE: MCD) was at the center of the most significant labor movement of 2013. The company has, between its owned and operated stores and franchises, hundreds of thousands of employees who earn barely more than the minimum wage. A recent study conducted by the National Employment Law Project (NELP) found that McDonald’s employees rely more on public assistance programs than any other large fast-food company, with an estimated $1.2 billion in costs to the public. Making matters worse, McDonald’s advised some of its employees to sell their possessions to make-up for holiday spending debt. Recently, the fast food chain’s hotline designated to help its workers live on their modest incomes encouraged employees to apply for food stamps. Low wages may be why the fast-food giant scored just 73 in the American Customer Satisfaction Index, the lowest in the limited service restaurant. McDonald’s poor revenue growth this past year can be explained in part by unfavorable economic conditions. Global same-store sales rose by only 0.9% in the third quarter. McDonald’s pays a substantial dividend and has share buyback programs, but its stock rose only 5% in the past year compared to 25% for the S&P 500. <a href="http://247wallst.com/special-report/2014/01/10/the-10-most-hated-companies-in-america-3/#ixzz2q86Fju5j" target="_blank">Read more at 24/7 Wall St.</a>