Fans of the Lululemon Athletica Inc. brand probably love the “we made too much” section around the company’s web site since it provides a number of products (some that should probably have never been made) at healthy discounts.
Investors, however, don’t like to see that type of thing whatsoever, which is why these were concerned with a report on Monday suggesting?the Vancouver-based apparel maker has inventory problems that may be the result of more than just the elements.
After all, Lululemon continues to be trying to shed its reputation for not managing inventories properly in previous years, an element that particularly hurt the stock in 2014.
The stock was down 3.1% Monday to shut at US$63.71 on the Nasdaq after Canaccord Genuity analysts revealed numerous store checks that uncovered \”[wear]house sale\” and \”spring cleaning\” events across many regions in the U.S. this past weekend.
Product discounts ranged from 20% to 50%, with slow-to-sell winter gear to be the focus of the sales.
Analyst Camilo Lyon?believes weather probably played a role in the traffic slowdown and subsequent inventory buildup because so many of the stores offering sales were in the Midwest and Northeast, but also, he found participating stores in southern places such as Austin, Tex., San Francisco, Raleigh, N.C., and Huntsville, Ala.
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“This suggests to us the excess inventory issues are more widespread and not just weather related,” he told clients, trimming his 2015 earnings estimate in front of the company’s quarterly results on Thursday.
Long before the sheer yoga pant debacle and founder Chip Wilson’s ensuing controversial comments, Lululemon intentionally did not keep enough product in stock.
Like many other popular clothing brands, the reason was to create pent-up demand, keep the hype going and push consumers to buy the newest apparel lines. The strategy worked, but investors had high expectations, so something that held back sales was seen as an bad thing.
A few years later, Lululemon was facing the alternative problem: Excess product was stacked up on shelves. Inventory jumped 23% within the first quarter of 2014, and also the stock suffered.
But Lululemon has returned in investors’ good books, having risen more than 60% since mid-October.
Much from the optimism stemmed from an overhaul of the company’s internal processes over the past year under leader Laurent Potdevin. The changes included an improved supply chain, product flows and fashions C all of which led to Lululemon’s strong outlook to kick off the twelve months.
Apparently, however, the inventory issues, at the very least, aren’t quite fixed at this time.
Lululemon, of course, is way from the only company to start 2015 slowly. Port delays and the extended cold temperature have hurt numerous retailers, but the worry with Lululemon is the fact that traffic and conversion trends – not the availability of winter apparel – appear to be the problem.
If those trends continue, they could lead to weaker comparable figures in the second half of the season, since the clients are less likely to commit to faster order growth whether it sees slowing trends in stores today.
Another problem for investors is the fact that Lululemon’s valuation sits in a hefty 35x forward earnings, which is substantially greater than the Nasdaq composite index.
Mr. Lyon isn’t the only who thinks the stock has run in front of itself and it is vulnerable to a sharp pullback if momentum stalls, because he believes it\’s. As Lululemon’s share price has risen in the past few months, so too has the short interest around the stock.
Lulu’s short interest ratio, which measures the short interest divided by the average trading volume, was as much as almost 12 on Monday, based on Bloomberg. It was below five as recently as January. The more than 14.5 million Lulu shares that are being held short represent a lot more than 14% of its public float.
