Lululemon shares drop as forecast cut spotlights challenges for incoming CEO

Lululemon founder Chip Wilson speaks after announcing a $100 million donation to preserve and protect B.C.'s natural spaces through his Wilson 5 Foundation, in Vancouver, B.C., Thursday, Sept. 15, 2022. THE CANADIAN PRESS/Darryl Dyck

June 5 - Lululemon Athletica shares fell about 8 per cent on Friday after the athleisure wear maker cut its annual profit forecast, fanning worries over the pace of its turnaround and shifting focus to the challenges awaiting the incoming CEO.

The selloff highlights growing investor unease over the once high-flying yoga wear brand, following a proxy battle with founder Chip Wilson and a series of product missteps that have dented its image, ahead of former Nike executive Heidi O’Neill taking over in September.

“Brand momentum is fading, share losses are building, and sales per foot are deteriorating .... The damage under the prior CEO is significant and long lasting,” Jefferies analysts said, adding that the company needs a full strategic reset under the new CEO.

Brand pressure, lackluster innovation

In the quarter, Lululemon attributed the sales weakness in part to a spike in “negative commentary” across media and social platforms, linked to a months-long proxy fight in which founder Wilson criticized the company’s leadership. It also blamed product launches that failed to resonate with its core affluent female shopper.

Wilson, who is one of the company’s biggest independent shareholders, had accused the brand of having lost its “cool” factor, with leaders keen to “replicate mass-market, lower quality athletic retailers.”

The negative sentiment has been compounded by stumbles in product innovation, including complaints that its US$108 “Get Low” leggings were see-through, alongside earlier issues with fit and design in recent launches.

The Vancouver-based company, whose leggings cost up to US$178, is in the early stages of a turnaround, ramping up discounting on older inventory and revamping marketing as tariffs squeeze margins.

Valuation slides

Its shares fell to an over seven-year low of US$109.36, adding to a bruising 12-month stretch in which the stock has lost nearly two-thirds of their worth.

The company forecast a drop in second-quarter sales for the first time since the pandemic, prompting at least nine brokerages to cut their price target on the stock. The median PT has fallen to US$149 from US$205 three months ago.

Growth has also been stifled by newer, fast-growing players in the space such as Alo, Vuori and Skims in the U.S., even as China remains a bright spot for Lululemon.

For the full year, profit is now expected to slide up to 17 per cent following a 9 per cent drop in 2025 and operating margin is seen contracting 380 basis points to 16.1 per cent, the lowest since 2006, according to brokerage William Blair.

Against this backdrop, attention is turning to incoming CEO O’Neill, with investors closely watching whether she can revive product innovation and restore momentum in the U.S.

The company’s valuation multiple has compressed to around 10 times forward earnings, well below 22.85 for Nike and 15.10 for Adidas , according to LSEG data.

“Now that the CEO transition path is set, fundamentals come back into view and they are not good,” said BNP Paribas analyst Laurent Vasilescu.

(Reporting by Akriti Shah, Kanishka Ajmera and Savyata Mishra in Bengaluru; Editing by Vijay Kishore and Devika Syamnath)