TA TA, LULU

Yoga retailer’s CEO stepping down; company plans to delist from TSX.

TORON TO • With a surprise exit announcement from popular CEO Christine Day on Monday, it could be a while before management at Lululemon Athletica Inc. finds itself in the relaxation pose after recovering from a vast yoga pants recall.

Despite beating predictions for sales and revenue in the first quarter, Lululemon’s shares plunged 13% in aftermarket trading when the company announced Ms. Day, a former Starbucks executive, would step down from her role when the company finds a suitable successor.

“This was a personal decision of mine,” Ms. Day, who notified the board of her decision on Friday after leading the company for five-and-ahalf years, told analysts during a first-quarter conference call.

Ms. Day, known for bringing a more collaborative culture to the company in its relationship with store managers and employees, said the timing is right because Lululemon has a clear vision for the next decade.

She will stay with the retailer to allow a smooth transition for her successor, she said.

“I am here for a while.”

Her announcement came after she guided the powerhouse brand through its biggest rough patch to date in March: the recall of 17% of its women’s yoga pants from store shelves and warehouses after they were deemed too sheer.

The pricey brand, whose reputation was forged on high-quality goods made from its proprietary fabric, Luon, saw its shares slide 12% in the aftermath of the recall, but since a March nadir they had risen 30% by Monday’s close.

Analysts applauded Ms. Day for her swift action after the recall, which included regular updates and an overhaul in quality control.

The Vancouver-based athletic wear retailer had earnings per share of US32¢ for the period ended May 5, or US$47.3million, compared with US32¢ (US $46.6-million) in the same period a year ago.

Revenue in the quarter increased 21% to US$345.8-million from US$285.7-million in the first quarter, and samestore sales rose 7%.

Analysts were expecting average earnings per share of US30¢ and US$341-million in revenue, according to mean estimates from Thomson Reuters.

Direct to consumer revenue from the company’s burgeoning online business leapt 40% to US$54-million, about 15.6% and up from 13.5% a year ago.

The period included a provision of US$17.5-million for inventories charged to cost of sales related to the recall.

Ms. Day said the company is proud that the affected pants were back in stores within 90 days of the recall. She told analysts that company learned it had to put its own people in charge of all of the technical specifications of its products rather than having factory-level management assess the garments. “We really reinvented our whole quality control process end to end.”

And consumers have been receptive to the company’s changes, she said. Lululemon created a “back in black” marketing program to let consumers know the pants are coming back into stores, while the company has beefed up its product information with new online videos and updated and more detailed fit guides. She said updated tests show no difference between the latest Luon pants and those made between 2007 and 2010.

“You will already see far more support and education for the customer,” said Ms. Day. “The bounceback in loyalty and comments was really clear” after the recall and reintroduction of the pants, Ms. Day said.

Lululemon also updated its guidance on Monday, saying it expects revenue of US$340million to US$345-million in the second quarter and projected same-store sales growth of 5% to 7%. Diluted earnings per share are expected to be in the range of US33¢ to US35¢.

For fiscal 2013, the retailer expects net revenue in the range of US$1.65-billion to US$1.67-billion and earnings per share of US$1.96 to US$2.01.

The company also announced it would cease trading on the Toronto Stock Exchange on June 24, as the volume of TSX shares traded no longer justifies the expense of maintaining a dual listing. It will continue to trade on the Nasdaq.

Ms. Day said the retailer is sticking with a strategy of pushing into new styles and athletic categories. “Taking risks means we will make mistakes along the way,” she said. While tennis and golf styles are performing well, cycling was weaker last quarter compared to last year; the patterned garments 2012 were more popular than this year’s black ones, she said.

Lululemon is also moving into more localized assortments related to weather at its locations across North America, Europe, and Asia, as it relates to in-season items.