Lululemon CEO Departure Signals Caution for Wall Street
The sudden resignation of Lululemon Athletica's CEO, the face of the yoga apparel company for many years, had analysts scratching their heads on Tuesday and the news prompted a wave of price-target cuts and downgrades of the company's stock.
One analyst even wondered whether the unexpected exit would chip away at the former Wall Street darling's reputation in similar fashion to the pullback of Apple's stock in recent months.
"I think you've seen what happened with Apple following the passing of Steve Jobs," said Sam Poser, an analyst at Sterne Agee. "And I think the iPhone is no less good, but people's respect for that brand might have changed a little bit. And I think that's the risk here with Lulu at this time until we hear who the new management is."
Since Jobs' death in October 2011, Apple's been dogged by Wall Street investors, who question whether the tech giant's innovation has begun to fizzle and wonder whether it can maintain its same high-growth rate.
Like Jobs, Christine Day was seen by many as the engine behind Lululemon's success and its rapid growth.
Day's decision to step down as Lululemon's chief executive and from its board, positions she's held for five years, came just a week after Lululemon said it was starting to get some of its popular Luon yoga pants back on store shelves after they were recalled in March for being too sheer.
It also adds to the list of vacancies the company is hoping to fill soon as it tries to recruit top positions to oversee its logistics, supply chain and merchandising.
Following Day's announcement, Sterne Agee downgraded its rating on the company to a "neutral" from a "buy" and cut its price target to $75 from $90, citing in part "a lack of information regarding the future leadership of Lulu (that) is of great concern."
UBS also cut its rating to a "neutral" and dropped its target price to $72 from $90 after the sudden decision, which it said was "a tipping point following the recent loss of the chief product officer, quality control issues and internal fourth-quarter execution issues."
In total, about a half-dozen analysts slashed their price targets on the yoga apparel maker's stock.
What was particularly surprising about Day's planned departure is the company seemed to handle the yoga pants snafu well.
Since the stock bottomed in late March in the wake of the recall of the transparent pants, it rebounded about 30 percent before Monday's news. Investors, like many analysts, responded to the news quickly, sending the stock down more than 16 percent in trade on Tuesday. (Click here to track the company's stock.)
Day's announcement coincided with the company's first-quarter earnings report, in which it delivered earnings and revenue that topped expectations along with a same-store sales increase of 7 percent on a constant dollar basis.
Gross margins were hit during the quarter because of write-offs of the recalled pants and the impact of a lower mix of higher-margin items, such as the Luon pants.
Sterne Agee analysts forecast that gross margins would remain challenged because of the costs of fixing the Luon problem and the expense of building a better supply-chain infrastructure.
Still, this isn't entirely a negative in Sterne Agee's opinion. "We view investments in systems and infrastructure as essential for the long-term growth and health of the company," its report said.
While Day said she wanted to leave for "personal reasons" during the earnings conference call, ISI Group analysts were left with more questions than answers. They wondered whether it made sense that she would depart just as the brand was about to break out into the global space and why she would say now is the correct time for a new leader to herald the company into this global phase when she has the experience from her tenure as president of Starbucks' Asia-Pacific group.
"Was Ms. Day forced out by founder, chairman and largest voting shareholder Dennis "Chip" Wilson because of the recent, highly publicized product quality issues only 1 year after Wilson resigned as chief branding and innovation officer?" ISI wondered. "Why would the board force out Ms. Day after she successfully oversaw 38-percent average annual revenue growth, 52-percent average annual earnings-per-share growth and about $10 billion of market value creation (stock up 500 percent since her appointment as CEO)?"
Although ISI has a "strong buy" rating and a $100 price target on Lululemon stock, analysts said in a report that they expect the company's shares to remain range-bound until further light is shed on the situation.
Not every analyst was as hesitant about the company in the near term. Canaccord Genuity reiterated its "buy" rating.
"I think this is an opportunity," said Camilo Lyon, an analyst at the firm. "The fundamental story for the growth thesis has not changed whatsoever. It's still a very strong brand with a strong consumer following."
Canaccord has an $87 price target on shares of the company, which it said is going through one of the ups and downs that companies encounter as they mature.
"It's really a test of the company and company's board to see how they manage through this," Lyon added.
—By CNBC's Katie Little. Follow her on Twitter @KatieLittle
Disclosure: Canaccord Genuity or one or more of its affiliated companies intend to seek or expect to seek compensation from Lululemon in the next six months. Neither ISI nor its affiliates beneficially own 1 percent or more of any class of common equity securities of Lululemon. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Sterne, Agee & Leach makes a market in the following subject company Lululemon. Sterne, Agee & Leach research analysts receive compensation that is based upon various factors, including Sterne, Agee & Leach's total revenues, a portion of which is generated by investment banking activities. Sterne Agee & Leach expects to receive or intends to seek compensation for investment banking services from the subject company and/or companies in the next three months.