Lululemon (NASDAQ:LULU) is struggling and its profits are drying up. Wayward comments from founder and former CEO Chip Wilson and a recall due to pants being too sheer have hamstrung the once fanatically popular yoga wear retailer. Going into Thursday morning’s third quarter report and the critical holiday quarter brand weakness is still haunting Lulu.
Lululemon should be surging right now with the health trend propelling fast casual restaurants and athletic wear companies. Nike (NYSE:NKE) and Under Armour (NYSE:UA) stock are both on fire and consumers are ditching fast food for more nutritious alternatives like Chipotle (NYSE:CMG). You might expect Lululemon’s yoga apparel to be benefitting from all that momentum, but that simply hasn’t been the case.
Shares of Lululemon have sunk to $47.56, just 58% of their 2013 high ($82.50). The one week candle chart above from ChartIQ Visual Earnings shows Lulu’s incredible rise from just $2.17 per share in March 2009 up until last year when the brand’s troubles began. Now profits are shrinking and same store sales are on the decline.
This past summer, contributing analysts on Estimize were expecting Lululemon’s 2nd quarter to outshine its first 3 month period of the year which is typical during a normal year’s sales cycle. To the surprise of investors, Lululemon reported shrinking earnings (down 15% yoy) of just 33 cents per share and worryingly, comparable sales dropped 5%. Same store sales were flat on a constant dollar basis, but the higher repatriation cost of international sales due to the strength of the US dollar weakened the final top line number.
Total revenue for the summer quarter did increase 13% on a year over year basis, but that growth was driven by opening new stores and increasing online sales, which are less profitable.
Direct to consumer sales accelerated last quarter, growing by 16.2%, that’s up from 14.3% in the 2nd quarter of 2013. New store sales and online growth inflated Lululemon’s total revenue increase to 13%; That’s good but not great compared to Lulu’s 2 year average of 20% growth. One minor point on the bright side is that overall sales have expanded at a rising rate 2 quarters in a row since the relative whimper of a report that 7% gains were in FQ4 2013.
Thursday morning the Estimize community is forecasting Lululemon’s total sales to come in at $427.2 million, about $2.5 million (0.6%) higher than the Wall Street consensus which would represent a 12.4% yoy increase.
For any other company that might look healthy, but the bottom line is that on Thursday year over year earnings are projected to come in 11% lower.