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Lululemon trims outlook as Luon impact drags; shares slide

A Lululemon Athletica logo is seen outside one of the company's stores in New York, March 19, 2013. REUTERS/Lucas Jackson
A Lululemon Athletica logo is seen outside one of the company's stores in New York, March 19, 2013. REUTERS/Lucas Jackson

By Solarina Ho

TORONTO (Reuters) - Premium yogawear 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, sending its shares lower.

Lululemon said it expected mid single-digit comparable-store sales growth during the third quarter. That is down from the company's heyday, when sales rose 10 percent and more from one quarter to another.

Its shares fell some 7 percent to $64.09 on Nasdaq, even though second-quarter results came in above analysts' forecasts.

The third quarter was off to a weak start due to late deliveries of autumn products, a hangover from the disruption caused by the recall of its Luon pants, the company's signature item, Lululemon said during a conference call with analysts.

Lululemon said the recall would be a factor behind delayed deliveries through the rest of the year, and would cost the company $40 million to $45 million.

Vancouver, British Columbia-based Lululemon made form-fitting yoga pants a wardrobe staple for millions of consumers, effectively creating a market for high-end, fashionable women's athletic wear, and it built a reputation for clothing that could withstand years of use and hundreds of washes.

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

The company is looking for a new chief executive to replace Christine Day, who stunned the market when she announced in June that she would step down once a replacement was found.

"The search committee is in discussion with several high-caliber candidates and in the coming months expects to narrow the list to the final candidate," Day said on the analyst call.

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 $1.645 billion to $1.665 billion previously forecast.

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

Lululemon forecast third-quarter net revenue between $370 million and $375 million. Diluted earnings per share is forecast to come in between 39 cents and 41 cents.

"We believe investors are misvaluing this equity based on the assumption that the company's current operating margins (mid 20s) are sustainable compared to an industry average in the low teens," The Buckingham Research Group analyst John Zolidis said in a client note.

Zolidis has an "underperform" rating on the stock with a target of $52.

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 been expecting 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 to analysts' forecast of $343 million. Comparable store sales rose 8 percent for the quarter on a constant dollar basis.

(Additional reporting by Garima Goel in Bangalore; Editing by Janet Guttsman and Maureen Bavdek)

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