(Bloomberg) — Lululemon Athletica Inc. lowered its full-year outlook for a second straight quarter, reflecting the deepening challenges incoming Chief Executive Officer Heidi O’Neill will face when she takes over the top job next week.
Sales are now projected to be in a range of $10.35 billion to $10.5 billion in the current fiscal year that ends in early 2027. That’s down from June’s annual forecast, which was itself reduced from the previous view. The company also trimmed its outlook for earnings per share after reporting its first decline in comparable sales since the pandemic when they temporarily stopped reporting the measure.
Shares of Lululemon tumbled 19.5% in New York on Friday to their lowest level since May 2018.
The weak results and slashed guidance suggest that O’Neill’s task will be a difficult one as she looks to pull the company back from an extended slowdown and missteps that sparked a management reset. A former Nike Inc. executive, O’Neill is scheduled to take the reins on Tuesday, more than four months after being named to the role.
“Incoming CEO O’Neill has a mountain to climb,” Jefferies analysts led by Randal Konik wrote in a research note on Thursday. The second-quarter results “show brand momentum is fading fast and share losses are mounting,” they wrote.
Leggings Problem
The new leader’s immediate task will be to come up with a plan to win back market share from competitors like Alo and Vuori and rebound from product mishaps and an overreliance on discounts. She’ll also have to rebuild Lululemon’s executive team following a series of recent departures.
The results are “bad all around” said Bloomberg Intelligence senior analyst Poonam Goyal, who doesn’t see the company’s performance improving anytime soon.
“Even with Heidi joining next week, the issue is product innovation — and that fix doesn’t happen overnight,” Goyal said.
O’Neill’s appointment has been criticized on Wall Street because the tail end of her time at Nike coincided with a slump at the sneaker brand. She has countered that she and the company are being underestimated.
Lululemon’s performance is likely to fuel greater investor skepticism. It’s now projecting third-quarter sales of as much as $2.32 billion, below analysts’ expectations.
Sales of leggings declined about 20% in the second quarter. Executives said the company is experimenting by reducing its product selection and looking at offering a more curated assortment based on local tastes.
Analysts at BNP Paribas led by Laurent Vasilescu said the leggings problem could last years as customers move away from the style.
China Sales Decline
An error during a China promotional event also sparked a backlash that hurt results there. Earlier this year, the company apologized after using a Japanese taiko drum at a yoga event at the Great Wall.
O’Neill will also need to ensure that founder Chip Wilson is on board with her plans. The billionaire repeatedly criticized Lululemon’s management and strategy before agreeing to a cooperation agreement in May. As part of the pact, he will have regular meetings with O’Neill and refrain from speaking negatively about the company for about 18 months.
“We know there is significant work ahead for us,” Lululemon’s interim co-CEO Meghan Frank said during the company’s call with analysts. “We’re applying what we’re learning this year to how we operate globally going forward.”
Neil Saunders, managing director of GlobalData, attributed the weakness to “an incredibly boring assortment, too much non-core product that misses on both fashionability and style, and an absence of good technical innovation.”
“This is exacerbated by pricing as consumers will increasingly not pay a premium for what they see as mediocrity,” he wrote in an emailed comment.
–With assistance from Subrat Patnaik.
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