Lululemon Stock (LULU) Plummets After CEO Announces Departure, Workout Pants Recall Hits Profit

Lululemon stock drops after pants recall hits profit and CEO announces exit.

ByABC News
June 11, 2013, 10:26 AM

June 11, 2013 — -- Lululemon stock [NASDAQ: LULU] plummeted this morning after the apparel company's announcement that CEO Christine Day will step down when a successor is named.

Day, 51, joined Lululemon in January 2008 and oversaw the company as its annual revenue quintupled to $1.37 billion.

"This was a personal decision of mine," Day said during the question-and-answer portion of a conference call with investors Monday about its first quarter earnings. "And, look, it's never a perfect time to leave a company you love. I've had a great run."

Lululemon stock was down about 17 percent this morning.

The company, which was founded in 1998, declined to comment to ABC News about its stock and the CEO transition plan.

Lululemon, based in Vancouver, British Columbia, has loyal customers for its high-end yoga and active gear who participate in the company's free yoga classes and community events. But Lululemon took a hit in profits with the recall of its popular black Luon pants in March, saying they were too transparent when wearers bent over.

Read more about Lululemon's shortage of Luon pants

The company's first quarter earnings increased only 1.5 percent to $47.3 million, while revenue increased 21 percent to $345.8 million, compared to the same quarter a year ago.

Lululemon said it delivered the Luon pants back into stores within 90 days of pulling the line. But the company said its yoga pants won't be back in stock at full levels until the end of its second quarter.

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Jamie Katz, equity analyst with Morningstar, said the CEO's departure contributed to investor jitters because a number of other upper-level positions in the company now remain open. The firm's chief product officer, Sheree Waterson, left her post in early April, two weeks after the company's recall.

Day told investors she informed the board of her decision Friday. The Wall Street Journal reported she was 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.

The company said that the decision to leave was "entirely Christine's" and was not directed by the board of directors. Day provided a six-month transition period that the board will use to conduct a search for candidates.

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"After 5 1/2 years at the company building a first class team and achieving significant personal and business goals, Christine feels the timing is right for a new CEO to lead Lululemon through its next phase of growth," the company said in a statement.

The company recently opened two new showrooms in London, plus one in Berlin, Germany and Singapore. Day said the company expects to have three showrooms in China by the end of the year.

Other factors contributing to the drop in Lululemon's stock price are lower gross margins because of the Luon pants recall costs and a lower mix of higher-margin items, like the Luon pants.

Katz said the company's gross margin was mostly affected by the recall of the Luon pants, but it is "still disappointing."

The company's outlook for same-store sales in the second quarter was also weak, Katz said.

But Katz said the company's investment on strategic investments, international expansion and systems updates "will set Lululemon up for success in the future."

Jennifer Black, CEO and president of Jennifer Black & Associates, told ABC News that she was not surprised by the stock price's volatility in the short-term.

"We believe Lululemon is feeling significant growing pains," Black wrote in her note after the earnings report. "The company has a very loyal base of customers who are not just women who have climbed onboard the LULU train, but also men who have become much more engaged in the product offering and the attraction is growing."

Black said Lululemon's men's business "remains a significant growth opportunity."

Day said the company acted upon feedback last year and "added more colors to our polos and more variety and comfort and performance fabric."