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What Chip Wilson's Stake Sale in Lululemon Really Means

Stocks in this article: LULU UA

NEW YORK (TheStreet) -- Lululemon's (LULU) founder Dennis "Chip Wilson" unloaded 13.85% of his stake in the athletic apparel maker to private-equity firm Advent and the timing of the announcement is a red-flag warning on Lululemon's outlook for the remainder of 2014.

Lululemon, which my firm, Belus Capital Advisors, rates a sell, will announce its second-quarter earnings on Sept. 11, its second full period with CEO Laurent Potdevin at the helm. When it announced its first-quarter earnings in June, Lululemon warned about sales and profits in large part because of investments being made in the supply chain and product quality. For the second quarter, Lululemon called for revenue of $375 million to $380 million based on a comparable-store sales decrease in the low- to mid-single digits. Earnings per share are expected to be in the range of 28 cents to 30 cents.

The company said it expected revenue for 2014 in the range of $1.77 billion to $1.8 billion based on a comparable-store sales increase in the low-single digits. Earnings for 2014 were guided to $1.50 to $1.55 a share, or $1.71 to $1.76 on an adjusted basis.

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If Wilson believed that the second quarter would mark the reemergence of Lululemon as a darling of Wall Street amid strengthening fundamentals, why didn't he hold the stock on the premise that it would gain significant value on earnings day? Should that have happened, Wilson could have realized more value for his stake and as a voice as a Lululemon director. 

Wilson essentially demonstrated a lack of confidence in the company's ability to command the heady growth rates of yesteryear, which aided in the stock being favored on Wall Street. In other words, Wilson acknowledged that increased competition will continue to eat into Lululemon's profit structure and potentially its valuation.

Competition is coming from Under Armour (UA). The compression apparel marker is in the midst of its second major marketing push for its women's product line, recently introducing an ad of ballerina Misty Copeland that went viral. Further, Under Amrour now has more than 238 shops inside of Dick's Sporting Goods (DKS) compared to 254 Lululemon stand-alone locations.

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Under Armour's women's product sales rose 26% in the second quarter, and the business now exceeds $500 million annually. Lululemon's fiscal 2015 revenue growth is estimated at 11.7% year over year, far-removed from the robust 57.11% rate in fiscal 2011, according to Bloomberg.

Lululemon has reported five years of moderating revenue growth as competitive forces have ramped up. As that competition has increased, Lululemon's profit margins have been whittled away. According to Bloomberg, Lululemon's five-year peak gross profit margin was 56.9% in fiscal 2012; gross margin in the first quarter was 50.9%. 

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-- By Brian Sozzi CEO of Belus Capital Advisors, analyst to TheStreet. This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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