Shares of the yoga apparel maker were ripped to shreds by 23% (a typical Sears earnings day like move) on Thursday as fourth-quarter earnings came in light and the company acknowledged that, just like every other retailer in the mall, the first quarter is off to a slow start. One person that was quick to chime in was Lululemon founder and shareholder Chip Wilson, who has been a vocal critic of current management.
"Obviously there is a long-term issue with Lululemon," Wilson told CNBC, blasting CEO Laurent Potdevin for artificially keeping the stock price high by cutting expenses.
Such a harsh reaction by the market and Wilson are likely a reflection of several things.
First, investors are now concerned that Lululemon is no longer special -- that even its high quality pants and tops can't attract people to the increasingly forgotten mall. In many respects, it may just be another mall retailer such as Sears, except that it's cloaked in a cool store facade, stuffed with pretty clothing and offers free yoga classes (see below). Instead of visiting the mall, people may simply buy athleisure outfits from rivals Nike (NKE - Get Report) or Under Armour (UA - Get Report) online, or head to an off-price retailer such as TJX Companies (TJX - Get Report) . Lululemon shares have commanded a premium valuation on the belief that it sells Apple (AAPL - Get Report) like products -- things that are best in class, which people are willing to go out of their way to try out, and ultimately buy.
The Yoga Shop is the STUDIO OF THE MONTH at Lululemon, Westfarms Mall. Come get your free LivFree Power Yoga on at 10am every Sunday in April (no class Easter Sunday). April 2: Sarah April 9: Annie Q April 23: Kim April 30: Courtney ❤️ #theyogashop #livfreeyoga #yogacommunity #yogatribe #communityyoga #lululemon
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Secondarily, there is now a fear that Lululemon's product development is about to hit a rough patch. On a conference call with analysts, Lululemon admitted it needed more color in its assortment during the fourth quarter. While it vowed to correct course this spring, the market feels hurt, as it has embraced Lululemon's improved R&D that has fueled good results over the past year. Factor in fear among some that the athleisure trend is dying out -- with jeans coming back into focus -- and it's no wonder Lululemon's stock will be down for the count on Thursday.
All in all, the market's response is dead right. Lululemon didn't deliver and the backdrop for retailers -- especially mall-based ones -- remains absurdly competitive right now. Don't attempt to be a hero by trying to pick the bottom on Lululemon, it's likely the market will take it down further. The smarter way to play this rout is via Nike -- its results and commentary shared recently look stellar, even more so in light of the stock's earnings related rout.
Lululemon went from having great comparable-store sales in the previous quarter to having negative comps this quarter. That's pretty bad, TheStreet's Jim Cramer, manager of the Action Alerts PLUS portfolio, said on CNBC's "Mad Dash" segment.
The stock is being deservedly punished for the company's results, he added. But there's a bigger-picture problem at stake. A comeback for the current quarter looks unlikely, with February and most of March getting off to weak start. That means Lululemon needs really good results in April.
But here's the problem. Even if that happens, Cramer said it's unlikely the stock will get the same valuation it had pre-earnings. Investors aren't likely to pay the same valuation for a stock that doesn't have secular growth.
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