Many investors must be wondering when a turnaround will surface for lululemon athletica (LULU). It’s one thing to look at a competitive market like women’s sportswear and gauge the proper valuation for unique growth companies.
But it’s quite another mystery to figure out what’s going on inside of a company that may be contributing to its own downfall. Luckily, followers of the Zacks Rank have not needed such insight when they could just look at the earnings estimate data which told the story of a business in troubling decline.
LULU shares earned the Zacks #4 Rank (Sell) last August when they were trading over $70. Throughout out the rest of 2013, the stock consistently remained a #4. Then in late January after another quarterly report that sent analysts scrambling to lower their earnings estimates, LULU became a Zacks #5 Rank (Strong Sell).
Here’s what my colleague Tracey Ryniec wrote in her Bear of the Day starring LULU in April, where she described the challenges for new CEO Laurent Potdevin in igniting a turnaround…
In the fourth quarter earnings press release, he described 2014 as an “investment year” but pledged continued global expansion.
The company provided earnings per share guidance in the range of $1.80 to $1.90. That was well below the Zacks Consensus of $2.19.
Not surprisingly, analysts moved to cut their estimates. 18 estimates have been lowered for fiscal 2014 pushing the Zacks Consensus down to $1.87.
That is negative 2% earnings growth as lululemon made $1.91 in fiscal 2013. Analysts are also bearish on 2015 as 12 estimates were also lowered in the last week for that year.
What’s Changed A Quarter Later?
Two weeks ago, LULU reported for its first quarter of fiscal year 2014. Even though they offered an earnings beat, the guidance was not a good fit for Wall Street.
The troubles for the leading yoga-inspired athletic apparel and accessories retailer seem to be multiplying as even the better-than-expected earnings results and a $450 million share repurchase plan failed to impress investors over the company’s lowered fiscal 2014 outlook.
Despite the better-than-expected first quarter performance, the company came up with a disappointing forecast for the second quarter and slashed its fiscal 2014 guidance as it focuses on transitioning from the demerits of last year’s product recall as well as growing international presence.
During the June 12 trading session, the stock crashed nearly 16% to around $37, its lowest levels in over 3 years. And that’s because investors knew what was coming next: downgrades and razing of forward earnings estimates.
Over 20 covering analysts took the Zacks consensus EPS for this year down from $1.87 to $1.74. And next year was taken down from $2.22 to $2.01.
Goldman Sachs to the Rescue?
According to a Wall Street Journal story on Sunday, the founder of lululemon, Dennis “Chip” Wilson, has turned to Goldman Sachs (GS) as he seeks a shake-up of the yoga retailer’s board of directors and may consider options including a proxy fight or joining a private equity firm in a buyout.
At this point, any shake-up at LULU will probably be a good one. But how will we know if it leads to the much-anticipated turnaround?
We won’t know, until it’s under way. But one of first and best clues will be when the analysts take notice of progress and start revising their earnings estimates back upward. And that will show up first in the Zacks Rank. Stay tuned.
Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money portfolio.
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