Lululemon founder dumped stock ahead of collapse
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Lululemon Athletica Inc. ( TSX: T.LLL , Stock Forum ) ( NASDAQ: LULU , Stock Forum ) founder Dennis (Chip) Wilson sold almost $50 million worth of shares last week, according to a filing with the U.S. Securities and Exchange Commission.
That was just before the yoga pants retailer announced on Monday that it is looking for a new Chief Executive Officer following the departure of longtime supremo Christine Day.
SEC filings show that Wilson sold 607,545 shares for $81.50 on June 7, 2013 for $49.5 million. He also sold another 392,445 shares for $81.87 on June 4 for $32 million. On May 20, 2013, he unloaded an additional 377,415 shares at $81.67 for $30.8 million.
By selling $112 million worth of shares in that period, he avoided the 23% stock price collapse that occurred this week following news of Day's plannned exit from the company.
As noted by Short Report on April 4, 2013 , Day’s departure comes after Vancouver-based Lululemon said it was facing a revenue loss of up to $67 million this year as a result of a fabric problem associated with its signature women’s yoga pants.
Day is not the only one to leave the company in the wake of embarrassing reports, indicating that the fabric was too revealing when the wearer bends over. Lulus’s chief product officer Sheree Waterson also departed last month.
In a June 10 press release , Day said that in order to facilitate a smooth transition, she will continue to lead the company until a successor is found.
But after watching the stock sink 23% from $84.03 on June 10, 2013, to $65.61 on June 12, Canaccord Genuity Consumer analyst Camilo Lyon said he sees more downside potential, at least until Day’s successor is named.
In its Morning Coffee newsletter, the investment firm said Lyon was a huge fan of Day’s as she was instrumental in building the LULU brand to where it is today.
He said her departure is likely to weigh on the stock, even though the company posted better than expected financial results earlier this week. Lululemon reported a profit of $47.3 million or 32 cents a share on revenue of $345.8 million in the first quarter ended May 5, 2013, compared to a year ago profit of $46.9 million or 32 cents on revenue of $285.7 million.
Lyon had been forecasting a profit of 30 cents a share.
Lululemon says it expects to post net revenue of between $340 million and $345 million in the second quarter of fiscal 2013, based on a comparable store sales percentage increase of 5% to 7%. Diluted earnings per share are expected to be in a range of $0.33 to $0.35 for the quarter.
While details are scant, Lyon believes the CEO’s departure was prompted by product quality issues, Canaccord said in its report.
According to the Wall Street Journal, “she [Day] told the [company’s] board she had become exhausted working 18 to 20 hours a day and didn’t want to commit to the three to four years of heavy business travel needed to implement international expansion plans, according to a person familiar with the matter.’’
But whatever the reason, Lyon believes the lack of visibility in key leadership roles (CEO, designer, supply chain) heightens the near-term uncertainty, likely leading to “multiple compression.”
At this time, Lyon has no reason to believe the fundamental growth trajectory of the business or consumers’ desire for the brand has changed, but recognizes the risk profile is greater today, Canaccord said.
Moreover, Lyon suspects that there will be less tolerance for future stumbles until a successor is named.
In Lyon’s opinion, LULU remains a strong retail growth concept, but lowered his P/E multiple to 30 times from 35 times, which resulted in a modest price target reduction to US$87 from $92.
LULU plans to delist from the Toronto Stock Exchange at the close of trading on June 24, 2013 . But the stock will continue to trade in the U.S. on NASDAQ.
At the close of trading Wednesday , the company had a market cap of $7.3 billion, based on 111.7 million shares outstanding. The 52-week range is $85.10 and $52.55.
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