Lululemon shares dive on risks of prolonged overhaul under new CEO

Lululemon Athletica shares slid about 20% on Friday as ​investors weighed the chances of a long-drawn-out overhaul ‌for ​the company under incoming CEO Heidi O'Neill, after it cut its full-year forecast for a second time. The athleisure company synonymous with its stretchy yoga pants has struggled to stem a ‌bleed in margins as well as worsening brand perception. It is also trying to recover from merchandising missteps, an over-reliance on promotions and loss of market share to new rivals.

At least 12 brokerages lowered their price targets on Lululemon on Friday, with analysts arguing the company still ‌operates a cost structure built for growth despite declining sales, with store square footage up 11% in the second quarter. Revenue in ‌the Americas, Lululemon's largest market, fell 8% in the quarter compared with a 1% rise a year earlier, while China revenue fell 2% after growing 24% the previous year.

"I think the store expansion will slow down," Morningstar analyst David Swartz said, adding that cost cuts, management changes and a possible operational "realignment" can ⁠be expected. Lululemon needs ​to win back customers from ⁠rivals such as Skims and Alo Yoga with relevant merchandise, Swartz said. O'Neill must also decide the future of categories such as footwear, which have potential but ⁠have seemingly failed to catch on, he added.

A TOUGH WAY BACK The weak results and the forecast cut were set to "unnerve meaningfully" even longer-term investors in ​the stock, Brian Nagel, analyst at Oppenheimer Research, said in a note, adding that investors should await O'Neill's initial turnaround ⁠plan.

The firm's shares were trading at about $100 in early trading, which is near their 2018 levels. If losses hold, Lululemon would lose about $2.5 billion in market value, deepening ⁠the ​stock's year-to-date decline to about 41.5%. "Lulu is a powerful brand but an overstretched one," Guggenheim analyst Simeon Siegel said. The company needs to return to what made the brand special although it was hard, he added, as appealing to many means moving ⁠past what made it so specialized.

The company also blamed regional weakness in China on the backlash to a marketing campaign on ⁠the Great Wall of China which ⁠featured a Japanese taiko drum, but analysts expect sales to keep declining amid economic weakness and competition. Lululemon's shares were trading at about 11.50 times forward earnings, compared with 20.76 for peers Nike ‌and 13.41 for Adidas.