UPDATE 2-Lululemon CEO to step down, stock slumps

Mon Jun 10, 2013 6:11pm EDT

By Susan Taylor and Solarina Ho

TORONTO, June 10 (Reuters) - Lululemon Athletica Inc , its fortunes dented by an embarrassing and costly recall of excessively see-through pants, said on Monday that Chief Executive Christine Day will step down once it finds a replacement.

Lululemon shares slumped as much as 15 percent after the news of Day's surprise departure, which came just three months after the company's second major quality issue in less than a year. Lululemon's chief product officer left in April.

"This was a personal decision of mine and, look, it's never perfect time to leave a company that you love. I've had a great run at Lululemon over the past five and-a-half years and I'm really proud of what the team and I have accomplished," Day said during a conference call with analysts.

Vancouver-based Lululemon carved out a lucrative niche with its high-end, fashionable yogawear, building a reputation for clothes that can withstand years of sweaty yoga classes and hundreds of washes.

It has said the recall of the stretchy black pants could cost up to $40 million profit this year, with most of the impact coming in the second quarter. But it reported a slightly better-than-expected first-quarter profit, as it brought its top-selling pants back onto store shelves.

Lululemon said it was announcing Day's departure now so that its board has time to conduct a thorough hunt for a replacement.

Day said in March that her team was "devastated" by the recall. The company's Taiwanese supplier said it had followed Lulu's specifications, and the retailer had apparently misjudged customer tastes.

The pants recall came eight months after Lulu admitted problems with dye bleeding from some bright garments, raising fresh questions about whether it could sustain a fast-track growth record while maintaining high quality standards.

BUILDING THE MARKET

Lululemon made form-fitting yoga pants a wardrobe staple, effectively creating the market for premium women's athletic wear. Targeting young professional women, it built a reputation for quality in Canada before tackling the tough U.S. market.

But a cluster of rivals have since rolled out more yoga and running wear, typically at lower prices, heating up competition. They include brands from Under Armour, Nike Inc, and Gap Inc's Athleta banner.

Lululemon said net income for the quarter to May 5 edged just slightly higher to $47.3 million, or 32 cents a share, from $46.6 million, or 32 cents, a year earlier. Analysts had, on average, expected a profit of 30 cents a share.

Revenue rose 21 percent to $345.8 million.

Same-store sales rose 7 percent in the first quarter, a sharp slowdown from a year earlier, when sales were up 25 percent.

That growth will remain sluggish into the current quarter, when Lululemon expects sales at established stores to rise between 5 and 7 percent, down from a 15 percent gain in the same period last year.

It sees second-quarter revenue of $340 million to $345 million and earnings per share between 33 and 35 cents.

Lululemon will voluntarily delist its shares from the Toronto Stock Exchange at the close of trading on June 24 because the "minimal trading volume" does not justify the cost of a dual listing.

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