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Lululemon Tanks as CEO Exit Leaves Retailer Floundering

NEW YORK (TheStreet) -Lululemon Athletica (LULU) plummeted Tuesday following yesterday's announcement that CEO Christine Day is stepping down despite the yoga-apparel maker posting quarterly earnings that beat estimates.

Shares of the Vancouver-based retailer fell 17.5% to $67.85 as Sam Poser, equity analyst at Sterne, Agee & Leach, downgraded Lululemon to neutral from buy and cut its 12-month price target to $75 from $90.

"The unknown replacement for Christine Day and the need for key senior executives leave us on the sideline until there is more clarity," Poser wrote in the note.

Lululemon is already trading at a comparatively high multiple, Poser told TheStreet in a phone interview. The stock is trading at 37 times current earnings, according to Bloomberg data on Tuesday compared to the S&P 500 Retailing Index which trades at 25 times earnings.

As the company also needs to hire three other key executive positions - heading its product design, logistics and supply chain division, "on top of her leaving, it's a very hard to buy into the stock here," Poser says. "We weren't telling anybody to short it. We think though its wait and see situation."

The CEO resignation was announced in conjunction with its first-quarter earnings results, beat analyst's expectations. Net income rose 1.5% to $47.3 million, or 32 cents a share, from a year earlier. Day, a longtime Starbucks (SBUX) executive, was hired by lululemon in January 2008 as executive vice president of retail operations. She was appointed CEO roughly five months later.

Analysts, according to Yahoo! Finance, were expecting the Lululemon to post diluted per share earnings of 30 cents a share on $341 million. The May 5-ending quarter's net revenue jumped 21% to $345.8 million. Comparable stores sales for the quarter rose 7%.

Lululemon also said it plans to delist its stock from the Toronto Stock Exchange on or about June 24, 2013.

Sterne Agee's Poser says the stock is "still a growth story."

"What differentiates Lululemon ... it's the product and the entire brand experience from yoga classes to the runs to brand ambassadors, the whole thing together and they really don't have competition on the other stuff and that's what separates them. I think Christine had a lot to do with leading that charge," Poser says.

Canaccord Genuity analyst Camilo Lyon is more bullish and reiterated his buy rating on the stock.

"At this time, we have no reason to believe the fundamental growth trajectory of the business or consumers' desire for the brand has changed, but recognize the risk profile is greater today," Lyon writes in a note on Tuesday. Lululemon "remains a strong retail growth concept."

Lyon cut his 12-month price target by $5 to $87.

After five and a half years, Day will step down as CEO when a successor is named, the company said late Monday.

"Plans have been laid for the next five years and a vision set for the next 10. Now is the right time to bring in a CEO who will drive the next phase of lululemon's development and growth," Day said in the company's earnings release. "I will continue to actively lead the organization while the board searches for a new CEO, and will work to ensure a smooth transition."

Lululemon, this month, restocked shelves with its black luon yoga pants. The company was forced to pull the popular pants in March after complaints that the pants were too sheer.

Also see: Lululemon's Reaction to Yoga Pants Mishap: Brilliant Marketing

"The past quarter has been one of the most important in our company's history," Day added. "While we regret that we had quality issues with our black luon we are proud of the organization's ability to get luon delivered back into our stores within 90 days of having pulled it from our line, all the while keeping our guests happy and engaged with the brand."

The company said it expects second-quarter net revenue in the range of $340 million to $345 million, based on a comparable-store sales increase of 5% to 7%. Lululemon said second-quarter earnings per share are expected to be between 33 cents a share and 35 cents a share.

For the full year, net revenue is expected to be in the range of $1.6 million to $1.66 million on $1.96 to $2.01 per share for the full year.

"The company believes that the minimal trading volume of its shares on the TSX no longer justifies the expenses and administrative efforts associated with maintaining this dual listing," it said in the release. "The company's listing with NASDAQ provides its shareholders with sufficient liquidity, as NASDAQ accounts for nearly all of the company's current trading volume."

-- Written by Laurie Kulikowski in New York.

To contact Laurie Kulikowski, send an email to: Laurie.Kulikowski@thestreet.com.

>To submit a news tip, email: tips@thestreet.com.



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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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