Lululemon outlook still crimped by sheer pants debacle; shares slide

By Solarina Ho

TORONTO (Reuters) - Retailer Lululemon Athletica Inc , still recovering from an embarrassing recall of excessively see-through yoga pants, trimmed its outlook for full-year sales and profits on Thursday, saying tougher quality controls have spawned delivery delays.

Vancouver, British Columbia-based Lululemon has made form-fitting yoga pants a wardrobe staple for millions of women and built a reputation for clothing that can withstand years of use and hundreds of washes.

But the March 18 recall of black Luon fabric yoga pants, its biggest-selling item, dented its reputation badly, and its chief product officer left the company in April.

Lululemon's shares fell as much as 8 percent after it said the third quarter had got off to a weak start due to late deliveries of fall seasonal items, a hangover from the disruptive recall.

"We're working back through all of our other fabrics to make sure that we're hitting the quality standard we want," Chief Executive Christine Day, who is also set to leave the company, said on a conference call.

She said commercialization - the development and testing of fabrics and products - is the main bottleneck facing the company, which effectively created the market for high-end yoga wear.

Delivery delays are likely to last through the end of the year even though Lululemon is air-freighting some items to its stores, and incurring extra costs as a result, she added.

The delays come as Lululemon is seeing increased competition from Under Armour Inc , Nike Inc , and Gap Inc's Athleta banner, among others.

The retailer said on Thursday it expects comparable-store sales growth in the mid single-digits in the third quarter. That is down from the company's heyday, when sales rose 10 percent and more from one quarter to another.

"Lulu has been on a growth tear for many years and at some point that growth has to slow," Liz Dunn, a senior analyst at Macquarie Group said in an interview with Reuters TV.

"They are still producing exceptional same-store sales growth relative to peers, but it certainly...is less than what they had been experiencing."

CEO HUNT

The company is looking for a new CEO to replace Day, who stunned the market when she said in June that she would step down once a replacement is found.

Day told analysts that the board search committee was talking to a number of candidates and that it expected to narrow the field to a final candidate in the "coming months".

Analysts say finding the right CEO is crucial for Lululemon, which is still a fast-growing operation.

"We think this requires an extremely sophisticated executive, preferably someone with more of a luxury background than mass," said Omar Sadd, a partner at ISI (International Strategy & Investment) Group.

Jerry Stritzke, a Lululemon board member who left his job as chief operating officer at Coach Inc this summer, has been widely tipped as a CEO contender.

Industry sources have also named Chanel CEO Maureen Chiquet, Nike vice president Jan Singer, Warnaco Group Inc CEO Helen McCluskey, Victoria's Secret Direct CEO Bridget Ryan Berman, and Tumi Holdings CEO Jerome Griffith as possible candidates.

CAUTIOUS OUTLOOK

For the 2013 fiscal year, which ends in February, Lululemon expects net revenue of $1.625 billion to $1.635 billion, down from its previous forecast of $1.645 billion to $1.665 billion.

The company trimmed its forecast for full-year earnings per share to $1.94 to $1.97 from the previous $1.96 to $2.01.

Lululemon forecast third-quarter net revenue of $370 million to $375 million, and diluted earnings per share of 39 cents to 41 cents.

Lululemon, a Canadian company that lists its shares only on the U.S. Nasdaq index, said net income fell to $56.5 million, or 39 cents per share, in the second quarter from $57.2 million, or 39 cents per share, a year earlier.

Analysts had expected earnings of 35 cents a share, according to Thomson Reuters I/B/E/S.

Net revenue rose 22 percent to $344.5 million, on the high end of Lululemon's guidance. This compared with the average analyst forecast of $343 million. Comparable store sales rose 8 percent for the quarter on a constant dollar basis.

The company's shares pared some of their early losses and were down 5.9 percent at $64.97 on Nasdaq late in the day.

(Additional reporting by Bobbi Rebell and Garima Goel; Editing by Janet Guttsman, Maureen Bavdek and Peter Galloway)

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