The incoming CEO of Lululemon Athletica has a tall order after the apparel maker's latest quarterly earnings fell short of expectations, prompting the second fiscal-year guidance cut in a matter of months.
Longtime Nike veteran Heidi O'Neill is set to take the helm next week. She's coming in at a time when the maker of yoga pants and athletic shoes has steadily lost customers to competitors like Alo and Vuori and grappled with complaints over its product quality.
O'Neill has nothing short of "a mountain to climb," Jefferies analyst Randal Konik said after seeing the second-quarter results. In his view, the numbers indicate "brand momentum is fading fast and share losses are mounting."
Konik attributes the shrinking profits to decisions made under former CEO Calvin McDonald, who opened bigger and more expensive stores that left the company with higher fixed costs.
The word of caution came after Lululemon slashed its fiscal-year outlook for the second time. Management now sees sales in the range of $10.35 billion to $10.5 billion, representing a 5% to 7% drop from last year and down sharply from earlier guidance of $11 billion to $11.15 billion.
The company also sees full-year earnings of $9.48 to $9.73 a share. While the range includes the impact of second-quarter tariff refunds, but the company does not anticipate any more refunds. Lululemon had previously guided for earnings of $10.95 to $11.15 a share.
Both metrics missed Wall Street expectations. Analysts were projecting full-year sales of $11.03 billion and adjusted earnings of $10.84 a share, according to FactSet.
Lululemon stock plunged 20% to $97.09 in premarket trading Friday, pacing toward its largest single-day percent decrease since March 2020, according to Dow Jones Market Data. Shares have fallen nearly 20% this week, marking their worst performance since the week ending Jan. 17, 2014.
Konik called the quarterly results a "triple whammy," pointing to falling sales across three key areas: U.S. stores, women's apparel-highlighted by a 20% drop in leggings-and China on a constant-currency basis.
For the three months ended Aug. 2, Lululemon reported sales of $2.4 billion, below the $2.458 billion Wall Street expected, and down from $2.525 billion in the year-ago quarter.
Although adjusted earnings of $2.92 a share beat projections for $1.79 a share, the figure included 86 cents a share from federal tariff refunds, making underlying earnings power "materially worse than the headline," Konik said.
In a clear sign of weakening demand and rising competition, same-store sales fell 9% during the quarter, nearly double the decline of 4.6% that analysts had projected.
Citi analyst Paul Lejuez noted that "there weren't really any significant positives" in the latest quarter, as Lululemon struggles with both traffic and conversion issues across regions, adding that "it continues to push marketing investment to help address the traffic problem."
The only silver lining is the significant guidance cut, which gives O'Neill a clean slate to meet or beat expectations for the second half of the year. At the same time, "another cut is also possible once she starts; it's not an easy fix," Lejeuz said.