Put Simply, Lululemon Still Has Issues

Source: Lululemon's website

Just when you thought the drama at yoga-apparel maker lululemon athletica (NASDAQ: LULU  ) couldn't get any worse, it did just that. On June 12, Lululemon suffered another defection when it was revealed that CFO John Currie will retire in February 2015. Meanwhile, founder and former chairman Dennis Wilson, who also goes by "Chip" and who also happens to still have a 28% position in the company, broke ranks with the board and is making it difficult for the company to win anyone over.

At a time when the company needs to display solidarity from its executive team, it is doing the opposite, adding to the uncertainty surrounding this former cult stock. The company revealed a forthcoming share buyback, but is that just a smokescreen?

Trouble persists
The departure of Currie, who had a seven-year tenure with the company, marks the second executive search under way at Lululemon in the past year. It comes only months after newly appointed CEO Laurent Potdevin took the reigns following former chief executive Christine Day's exit amid the yoga pants debacle. So investors who were looking for stability among the executive team before finding an entry point are going to have to keep waiting. And it gets worse.

Wilson has waged an all-out war against the company's board of directors, having reportedly voted against two board execs, chairman Michael Casey, Wilson's own successor as chairman of the board, and board member RoAnn Costin.

Incidentally, Wilson's efforts are all in the name of the company's investor base, of which he belongs. He said in a press release: "Change is now needed at the board level to increase shareholder value." Unfortunately, all he seems to have done is to undermine the board's role and effectiveness while a shareholder exodus persists. From the company's latest 10-K filing: 

Mr. Wilson is able to influence or control matters requiring approval by our stockholders, including the election of directors and the approval of mergers, acquisitions or other extraordinary transactions. This concentration of ownership may have various effects including, but not limited to, delaying, preventing or deterring a change of control of our company. 

Wilson's argument is that the company is pursuing short-term fixes for much deeper routed problems. As the company's founder, he wants to see Lululemon succeed for the long term, which is what Foolish investors want, too. So in a sense investors might quietly cheer Wilson in the name of long-term value. But he certainly has an unorthodox way of fighting for what he believes in, and meanwhile his antics aren't giving the board much of a chance to succeed.

Rocky financial performance
While the $450 million share buyback will initially return value to investors, Lululemon has been struggling on the top and bottom lines. And so the share buyback may just be its way of doing some financial engineering to keep the earnings per share propped up. 

For instance, in its fiscal first quarter reported on June 12, Lululemon reported a 60% decline in profits to $19 million, or $0.13 per share, versus $47.3 million, or $0.32 per share, in the year-ago period. The company is taking a tax charge tied to its share buyback, and excluding that expense earnings per share came in at $0.34.

Lululemon did manage to deliver an 11% revenue jump to $384.6 million and eked out a 1% increase at stores open for at least a year versus a 12% same-store sales gain in the year-ago period. The company is projecting a comparable sales decrease in the low- to mid-single digits for the second quarter, and it lowered the high end of its full fiscal year revenue guidance.   

What stings is that Lululemon should be performing swimmingly. Sales of women's activewear, Lululemon's specialty, gained 9% last year compared to a more modest 2% increase in the apparel market overall, according to Wells Fargo cited in The Wall Street Journal

Lululemon has essentially handed a market share opportunity over to its competitors, including fellow athletic-apparel maker Under Armour and retailer Gap  (NYSE: GPS  ) and its Athleta brand, while its own comp sales have suffered. Gap opened 30 new Athleta North America stores in fiscal 2013, bringing its total Athleta North America store count to 65 since the maiden location was opened in 2011.  

Lululemon shares are trading at a forward P/E ratio of about 19.5, which is actually more expensive than shares of Gap, trading at a forward earnings multiple of just 13.8. Under Armour is priced for growth at a P/E of 60.1. 

Bottom line
Executive changes happen. Look, a sudden executive departure unfolded at tech darling Twitterat about the same time Lululemon's latest saga unfolded. But for Lululemon, the CFO's defection is the latest in a series of management shifts and it only widened the gap between the company and investors. The writing is on the wall via a 15% pullback in the stock in early trading on June 12: Now is not the time to invest in Lululemon.

That's not to say that in time it won't be time to pile into Lululemon. But at the moment, what are you paying for? The situation is volatile -- especially for the Foolish investor -- and in light of Wilson's restlessness with the board, it will remain so for the foreseeable future. In light of the gravity of the issues Lululemon is facing at the core of its management team, it's going to take time to work things out. Meanwhile, you might want to consider Gap or Under Armour, both of which have seized the opportunity in women's apparel.

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