UPDATE 4-Yogawear chain Lululemon cuts forecasts; shares dive

Mon Jan 13, 2014 3:17pm EST

* Company sees 4th-qtr revenue of $513-$518 mln

* Previous forecast was for $535-$540 mln

* Sees earnings 71-73 cents/share, down from 78-80 cents

* Sees negative same store sales, down from flat

* Stock hits $49, lowest in two years (Adds background and comments from analysts; updates stock price)

By Susan Taylor

Jan 13 (Reuters) - Sales at Lululemon Athletica Inc's established stores will likely fall in its latest quarter, the first year-on-year drop since 2009, the company warned on Monday, the latest in a spate of setbacks for the once high-flying yogawear retailer.

The stock dropped as much as 18 percent after the warning, the second such dive in less than two months, as analysts and investors questioned whether demand was faltering in the face of increased competition or whether supply-chain and other internal problems were to blame.

The Vancouver, British Columbia-based company, which has carved out a lucrative niche selling fashionable high-end workout clothes, said same-store sales, revenue and earnings in its fourth quarter, ending Feb. 2, would be lower than it forecast in December because traffic and sales in January slowed "meaningfully".

Lululemon, which was forced to recall some of its signature black stretchy yoga pants last March because they were too sheer, had already warned of a slowdown on Dec. 12.

At that time it acknowledged sales had been hurt by negative press about the product recall and by comments by founder Chip Wilson, who said Lululemon products "just actually don't work" with some women's body shapes.

Still, a slowdown in the company's once-stellar sales growth had started before the recall and the controversy over Wilson's remarks.

"It's a bad morning for Lululemon shareholders, but I think all signs, every fundamental sign pointed to this type of earnings reduction," said Brian Sozzi, chief executive of Belus Capital Advisors.

Sozzi said he believes that new, better-quality products from Nike Inc and Under Armour Inc might be cutting into Lululemon's sales. His store checks showed pricey workout gear from those brands selling well through the holiday season.

Poor customer relations are a bigger culprit in Lululemon's woes, Credit Suisse analyst Christian Buss said.

"It's highly likely that the bad PR, not just around product quality issues, but increasingly around the company ... arrogance in the way that they engage with their customers, is having an impact," he said.

As other retailers launch loyalty programs and customer-friendly policies to help spur demand, Lululemon has not followed suit, he said.

Customers, for example, must return products for a refund within 14 days, versus 30 days at many retailers.

Cowen and Co analyst Faye Landes slashed her target for the stock to $48 from $90 and downgraded the shares to a "market perform" from "outperform" after the warning.

Lululemon shares bottomed at $49 on the Nasdaq on Monday, their lowest level in two years, before edging slightly higher to $49.82.

"Maybe Lulu customers have shifted to more of a replacement than stock-up mode, which would mean fewer sales per person, and maybe competition is taking little bites out of Lulu's business, especially among less hard-core customers," Landes wrote in a note to clients, which said supply chain problems could also be to blame.

"We hope to find out the answers, but prefer to do so from the sidelines."

Lululemon will make a presentation at the ICR XChange Conference on Tuesday, but Chief Financial Officer John Currie and Chief Product Officer Tara Poseley may not discuss the warning in detail at the consumer trade show.

Last month, the company named Laurent Potdevin, former president at retailer TOMS Shoes, as new CEO.

Potdevin faces a tall task in repairing Lululemon, said Buckingham Research Group analyst John Zolidis, who pointed to under-investment in infrastructure, increased competition, and a "reckless" international growth strategy as reasons for Lululemon's difficulties, as well as brand damage from Wilson's comments and the company's quality problems.

"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 from a specialty apparel retailer," he wrote in a note to clients.

"Those days are now behind the company. Same-store sales have rolled over. Operating margins are now correcting closer to industry normal levels. The company has never operated in an environment of declining sales demand."

WINTER WEATHER HIT?

Several U.S. apparel retailers, including American Eagle Outfitters Inc and Zumiez Inc, lowered their forecasts last week as reluctant shoppers forced them to offer steep discounts during the holiday shopping season.

Lululemon did not say whether recent bad weather had played a role in its sales drop, but said the company had been on track to meet its sales and earnings guidance through the month of December.

"Since the beginning of January, we have seen traffic and sales trends decelerate meaningfully," Currie said in a statement.

Sozzi said he does not see Lululemon's struggles as part of an industry-wide trend because its target customer is relatively wealthy, which he said makes the warning even more troubling.

Lululemon said it now expects revenue of $513 million to $518 million for the quarter, down from its earlier forecast of $535 million to $540 million.

It also forecast same-store sales in the "negative low-to-mid-single digits" on a percentage basis, compared with its earlier forecast of flat sales.

Lululemon said it expected to earn between 71 cents and 73 cents per share in the quarter, down from a December estimate of 78 cents to 80 cents per share.

On average, analysts expected earnings of 79 cents on revenue of $541.3 million, according to Thomson Reuters I/B/E/S. (Additional reporting by Ashutosh Pandey in Bangalore and Allison Martell in Toronto; Editing by Jeffrey Hodson, Sayantani Ghosh and Peter Galloway)

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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