Can Lululemon's Stock Price Reverse Its Downward Dog?

This story has been updated from 3:02pm EST with comments from retail analyst Marie Driscoll.

NEW YORK (TheStreet) - Lululemon Athletica (LULU), the yoga and athletic apparel retailer that has struggled to recover from its own stumblings, reports first-quarter earnings Thursday and Wall Street analysts aren't expecting much of a recovery despite having a new CEO, the veteran retail executive, Laurent Potdevin.

But does that mean investors should stay away from the stock?

Lululemon shares have been stuck in reverse as the specialty retailer suffers through the lingering effects of last year's recall of its popular Luon pant, the resignation of former CEO Christine Day and the callous remarks by its founder Chip Wilson last year who exlaimed that the company's pants were not suitable for larger-sized women.

Shares are down 23% year to date.

Analysts say that at least in the short term, Lululemon shares are likely to endure more pain. "I wouldn't be buying this [stock] now," says retail analyst Marie Driscoll. "The brand still has strong appeal," however, investors won't see a "heady pop until they really execute."

Sterne Agee analyst Sam Poser agrees:

"LULU's same-store sales are likely not to exceed positive mid-single digits until 2016," Poser wrote in an investor report. "The LULU brand has been scarred and it will take great product, balanced with strong guest and community engagement for LULU to return to its prior greatness."

And that outlook came after Poser upgraded Lululemon on June 5 to "neutral" from "underperform," after the stock went above his $43 price target. 

As for guidance, Lululemon said in its March earnings conference call that revenue would be between $377 million and $382 million with flat comparable sales - which now includes both same-store sales and e-commerce purchases.

Analysts, according to Thomson Reuters, expect the Vancouver-based company's quarterly earnings to have increase by just 1% from last year's quarter to 32 cents per share. While revenue is expected to have gained 10% to $381 million, according to the average analysts' estimate, same-store sales - those stores open more than a year - are expected to decline 1.23% compared to a year ago in which comps rose 7%, Thomson Reuters estimates.

Just where this company is headed remains debatable.

TheStreet's Jim Cramer has said he is unsure what to make of Lululemon's new CEO, having been an admirer of his predecessor, Day. Cramer said in a video on TheStreet that the stock is very close to bottoming, but isn't there yet.

Potdevin, who took over in January, said 2014 is "an investment year, with an emphasis on strengthening our foundation, reigniting our product engine, and accelerating sustainable and controlled global expansion," according to its last earnings call in March.


UBS analyst Roxanne Meyer wrote in a Jun 10 research note that while the first-quarter comparisons will benefit from last year's recall-fueled pant shortage, "we believe slower moving core product, a lack of compelling fashion during most of [first quarter] and poor weather kept a lid on comps."

Lululemon, of course, was hammered by bad publicity after it was forced a year ago to recall its popular Luon pant over sheerness complaints. A few months later, following customer complaints about "pilling" on the yoga pants, Wilson arguably made matters much worse for the company when he said in an interview that: "Quite frankly, some women's bodies just actually don't work for it."

Wilson further added to a picture of Lululemon's instability fuel to the public relations fire on Wednesday by releasing a statement telling that he had voted against the re-election of the company's two outside directors - Lululemon's chairman and a former Starbucks (SBUX) executive, Michael Casey, and private equity executive RoAnn Costin Wilson. Lululemon is holding its annual shareholder meeting in Vancouver on Wednesday.

"While I am excited about the new management team that I helped put in place, I am concerned that the board is not aligned with the core values of product and innovation on which Lululemon was founded and on which the company thrived," Wilson said in the statement.

Wilson, who had resigned as Lululemon's chief innovation and branding officer in January 2012, had continued to serve as chairman. Following last year's pant recall, he oversaw the company's management shakeup, which included replacing Day with Potdevin, who has had brand and management experience at Louis Vuitton, Burton Snowboards and most recently as the president of TOMS Shoes. Potdevin started in his new position in January. Wilson said in December at the time of the new CEO announcement that he would be leaving the chairman position and replaced by Casey.

"I was hopeful that we would be able to create a balance at lululemon between product and growth that would complement each other," Wilson said. "Instead, I have found a palpable imbalance in board representation, which is heavily weighted towards short-term results at the expense of product, culture and brand and longer-term corporate goals. I believe this is impacting the company's prospects. My vote today sends a signal to the financial community that the company must address this imbalance if lululemon is to fully recover."

The women's activewear category is becoming increasingly competitive as the product becomes part of the mainstream. Activewear represents one of the fastest apparel categories in the U.S., Wells Fargo analyst Paul Lejuez wrote in a May 30 note, citing NPD, a consumer research firm. With names like Under Armour (UA), Nike (NKE) and retailers like Gap's (GPS) Athleta all playing in Lululemon's space, it will be especially difficult for the yoga apparel maker to reclaim its reign.

--Written by Laurie Kulikowski in New York.

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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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