RBC downgrades Lululemon, cuts target price
TORONTO - RBC Capital Markets cut its rating on Lululemon Athletica Inc. (TSX:LLL) and lowered its target price on the stock Thursday following the departure of the company's chief product officer.
RBC analyst Howard Tubin said Sheree Waterson was instrumental in the design process at the fashion company for the last five years and was a strong creative leader.
"While we continue to believe Ms. Waterson has a solid design team in place, the loss of her creative leadership adds a new level of uncertainty to the story," RBC said in an analysis Thursday.
"We prefer to move to the sidelines with our rating until we have better visibility on future product direction."
Tubin cut RBC's target price on the stock to $70 from $80 and lowered his rating on the maker of trendy workout gear to "sector perform" from "outperform."
Lululemon shares closed up $1.42, or 2.21 per cent, at $65.66 on the Toronto Stock Exchange on Thursday.
The departure of Waterson announced by the company late Wednesday came just weeks after Lululemon pulled its popular black pants made from its Luon fabric from store shelves over concerns they were too sheer.
The move forced the company to cut its financial guidance for the year.
Lululemon explained the problem arose due to a combination of the fabric and pattern changes in the pants.
"Since Ms. Waterson led the product organization, the current Luon issue, as well as other recent quality issues, are ultimately her responsibility; likely contributing to her departure," Tubin wrote.
"Her role will likely be split in two: one focused on design and one focused on production. While we believe this is the right move for a fast-growing company like Lululemon, it could take time to fill the design role with an appropriate candidate."
Lululemon said while the fabric involved may have met testing standards, it was on the low end of the tolerance scale.
As a result, the company said it is testing and assessing all Luon products to ensure they meet revised specifications.
It has also stationed employees at factories to ensure that the new tests and standards are being met.
In an analyst call last month, Day said the only way customers can tell if they bought the defective pants was to "put the pants on and bend over."
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