What’s next for Lululemon Athletica?

ANALYSIS_ Lululemon Athletica Inc. warned about a tough year ahead after the yoga fashion company saw its shares lost 15 percent on a weaker-than-expected first-quarter results. Its closely watched trading has spiked rumours of a potential interest among the likes of VF

Corporation or Nike.

The company reined in expectations earlier in June for its 2014 financial year and launched a share buyback program after a significant drop in the value of its stock over the past year. It was noteworthy the 15 percent price drop for the company's stock after Lululemon (Nasdaq:LULU) posted a lower first-quarter profit compared with a year ago and cut its guidance for the year.

“We knew heading into 2014 that driving sales in the first half of the year would be impacted by a sub-optimal product assortment combined with soft traffic trends,” chief executive Laurent Potdevin told investors on a conference call.

Potdevin added that “Second quarter sales have started off behind plans and (comparable figures from last year) are more impacted than we originally anticipated.”

Lululemon reported a first-quarter profit of 18.98 million dollars, or 13 cents per share, nearly a 50 percent less than the 47.28 million pounds profit, or 32 cents, reported a year earlier.

Lululemon athletica (NASDAQ: LULU ) shares have lost more than half their valuation in the last year. Despite the poor earnings the company has reported lately, many in the market are now calling it a value play.

Earlier in June, analysts Sam Poser and Ben Shamsian from Sterne Agee reduced their estimate for the yoga apparel brand's fiscal 2014 year earnings per share from 1.75 to 1.72 dollars per share. They also cut their 2015 fiscal year estimate from 1.97 to 1.92 dollars per share.

In contrast Lululemon Athletica inc. (NASDAQ:LULU) guide was 1.71 - 1.76 dollars per share for the full fiscal year. At this regard, Sterne Agee's analysis team called these numbers “optimistic” as they don't believe they don't take into account gross margin headwinds because of higher inventory levels.

VF Corporation, Adidas and Nike, listed a potential suitors for Lululemon

Despite the dire prospect, suitors willing to court Lululemon's founder and largest shareholder Chip Wilson would get a company that's projected to boost sales 46 percent over the next three years, highlighted various market insiders.

VF Corp. is one of the most likely candidates to consider acquiring Lululemon, said Canaccord Genuity Group Inc. But for Wedbush Inc., Adidas AG also would make sense as a buyer so it could use its international expertise to help guide Lululemon's overseas expansion.

Commenting on the market rumours about a potential approach from the likes of VF Corporation or Nike, Sterne Agee’s Poser and Shamsian said that they “continue to assert that the value of the LULU brand comes from the combination of great service and great product. We believe that an acquisition at this time would only further hurt the in-store experience and do more damage to the Lulu brand.”

“An acquisition of Lulu by Adidas or VFC would hurt those brands as well as hurt Lulu in the long run. Lulu must fix its own problems. We do not believe that throwing M&A theories into the marketplace, without detailed thesis is responsible,” the analysts summed up in a note issued earlier this month.

Angela González Rodríguez