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Lululemon's ( LULU +1.42% ) struggles just went from bad to worse. After several quarters of comparable sales declines in the core North American market and a plunging stock price, the athleisure retailer just reported its worst comparable sales result in modern history, with comps down 9% in the second quarter. Comps in the Americas region were down 12%, while the international segment, which had been a ballast for the company, fell 3% or 6% on a constant currency.
The disappointing results come at an especially bad time for Lululemon, as it's getting set to welcome a new CEO, Heidi O'Neill, a longtime Nike exec who joins the company after it was run for seven months by a pair of interim co-CEOs. The downbeat Q2 results are likely to increase pressure for a turnaround from Lululemon's critics, which include founder Chip Wilson, as O'Neill's hiring led him to write a scathing letter attacking the board. After a proxy battle, Wilson was able to add two allies to the board, but the rift and the dismal recent results show that O'Neill will have to hit the ground running when she takes the helm later this month.
We'll discuss whether O'Neill can turn things around, but first, let's review the quarterly results. Image source: Lululemon. Lululemon's spiral continues Overall revenue in the quarter fell 4% to $2.42 billion, missing the consensus at $2.46 billion.
The company's generally accepted accounting principles ( GAAP ) results benefited from $134.5 million of tariff refunds, but without that, gross margin was down 360 basis points to 54.9%, showing the impact of falling comps and merchandise discounts. Adjusted operating margin was down even more sharply, falling from 20.7% to 13.2%, showing its profits are quickly evaporating. Earnings per share, excluding the impact of the tariff refunds, fell from $3.10 to $2.06, which topped the consensus at $1.79.
The athleisure retailer’s guidance called for things to get even worse, with revenue declining 10%-11% in the third quarter, and for a full-year decline of 5%-7%. It slashed its full-year EPS guidance excluding the tariff refund to $8.62-$8.87. Not surprisingly, the stock was down 18% in after-hours trading.
Premium Feature Moneyball Superscore 54 /100 Today's Change ( 1.39 %) $ 0.53 Current Price $ 38.77 Can O'Neill right the ship? Even before today's news, O'Neill was already starting at a disadvantage. The stock sold off sharply after she was named as the next CEO, showing that investors don't see her as the right choice, echoing Wilson's sentiments.
O'Neill brings a wealth of industry knowledge after spending nearly 30 years at Nike and was part of the executive team that grew the business from $9 billion in annual revenue to $45 billion, and held a variety of positions dealing with product creation and design, marketing, digital commerce, and more. She was also credited with accelerating the company's time to market in categories like football and running. However, O'Neill was ultimately pushed out of Nike when CEO Elliott Hill took over and eliminated her position, which seemed to reflect that company's struggles since the pandemic.
O'Neill will take over at a rough time, not just for Lululemon, but for the broader footwear and athletic apparel industry , as companies like Nike, Deckers , and On Holdings have all struggled lately, indicating challenges across the industry. Given the skepticism the market and Wilson have already expressed toward her, she has a lot to prove. Investors should look for her to set a new strategy for the company, as continuing on the current path seems only likely to push the stock lower.
Given the challenges in the broader sector, any turnaround will take time.
Source: The Motley Fool
