Lululemon warns on Q4 sales, cuts outlook, sending shares lower

By Solarina Ho

TORONTO (Reuters) - Lululemon Athletica Inc warned on Thursday that fewer customers visiting its stores and ongoing supply chain issues are hitting sales in the crucial fourth quarter, news that sent shares of the trendy Canadian yogawear chain tumbling.

The company, which was hit by an embarrassing recall in March when some of its signature black pants proved too see-through, said sames-store sales would be flat and lowered its full-year outlook, raising concern about whether momentum at the once-hot retailer is fading.

Shares of the retailer, which named a new chief executive earlier this week, sank 10.8 percent to $60.96.

Lululemon has been plagued by problems throughout the year. The earlier recall spawned supply chain snags and delivery delays. It had already cut its full-year forecast in September.

Troubles were compounded by lingering complaints about product quality and public relations issues, including comments from outgoing chairman and founder Chip Wilson. He said in early November that some women's body shapes were not suited for Lulu's yoga pants.

Chief Financial Officer John Currie said in a conference call on Thursday that October was the strongest month in the third quarter, but sales slowed the following month.

"It is realistic to assume that when there is negative press that there is an impact on the business," said Currie, when asked about Wilson's comments. "I do think that has impacted us in November and early December."

The company said this week that Wilson would be stepping down from his position as Chairman next year, but remain on the board.

QUALITY CONTROL ISSUES INTO 2015

Following the recall, Lululemon ramped up its quality control measures. As a result, the company said some styles have been rejected in the process and not released to stores, causing uneven product flow, late product deliveries and in some cases, cancellation of purchases.

Outgoing Chief Executive Christine Day, who was not present on Thursday's call, had previously indicated the supply chain issues would likely to last until the end of the year, but the company indicated it would be longer.

"The impact of quality controls - as I said this is a journey ... by 2015 we should be seeing a much, much smoother supply chain operation," said Currie.

Lululemon announced on Tuesday that Day would be replaced by former TOMS Shoes executive Laurent Potdevin, who in addition to the supply chain problems, will have to fend off growing competition and shore up the company's reputation.

The semi-transparent pants were not Lululemon's first quality issue. In July 2012, the company said it was working to solve problems with dye bleeding from some of its brightly colored garments.

The sales forecast is a big reversal for Lululemon, which not long ago was posting same-store sales growth well into double digits.

"The guidance - it's clearly a source of concern. Flat comps suggest there's been a change in consumer demand for the product," said Christian Buss, an analyst with Credit-Suisse.

Buss noted that while the overall retail environment has been challenging, it did not explain away the outlook.

"Historically they have not been affected by the vagaries of the underlying mall environment," he said.

Last year's fourth quarter was itself disappointing. Day said last January that some of the chain's new products had fallen flat and that the company needed to make sure it carried enough goods at "gift-giving price points."

For the current quarter, which includes the holiday shopping season, Lululemon forecast earnings between 78 and 80 cents a share, and revenue from $535 million to $540 million. Analysts had been expecting earnings of 84 cents a share on revenue of $571.8 million.

For fiscal 2013, which ends around February, the retailer now projects net revenue to be between $1.605 billion and $1.610 billion, down from an already lowered forecast of $1.625 billion to $1.635 billion. Diluted earnings per share are forecast to be between $1.94 and $1.96 for the year.

Net income for the third quarter rose to $66.1 million, or 45 cents per diluted share, from $57.3 million, or 39 cents, in the same period a year ago.

Revenue rose 20 percent to $379.9 million. Sales at established stores rose 5 percent.

Analysts, on average, had been expecting earnings of 41 cents a share on revenue of $376.2 million, according to Thomson Reuters I/B/E/S.

(Additional reporting by Allison Martell; Editing by Jeffrey Hodgson and James Dalgleish and Grant McCool)