Last week, I thought shares of lululemon athletica (LULU) would get chopped in half. I wrote that many of the improvements that have pushed the stock higher were one-time events, mostly related to the easing of last year's West Coast port strike. I said that the second half of the year would be challenging, and that estimates were too high.
After my article came out, Anders Keitz looked more closely into the comments that Lululemon founder Chip Wilson made on CNBC to Jim Cramer.
Keitz looked in the background of three of the longest-serving board members -- and she couldn't find much information on them. She called them ghosts.
I'm concerned that a company of LULU's size has mystery board members. The active-apparel market is saturated, and the company needs its board of directors now more than ever. Besides some sketchy biographical information on the company's website, LULU hasn't even posted a photo of these mystery members.
LULU's pricing power is under attack from all sides. Companies like VF (VFC), Gap (GPS), Urban Outfitters (URBN), and Bebe Stores (BEBE) are just a few of the new entrants to market. LULU's basic yoga pants retail for $98, and the line goes all the way up to $298. In contrast, Nike (NKE) offers pants that start at $45. Competitors like Nike and Under Armour (UA) have considerable economies of scale that will keep the pricing pressure on "athleisure" gear, even as the trend inevitably fades.
I think LULU has an earnings-quality problem. Expenses are rising faster than sales. I don't believe the company can fulfill its second-half earnings guidance. I can't see how LULU will be able to beat last July's comparable number of 9%, and I do not see the company beating the January quarter figure of 11%. I think LULU will report comps of 4% and 4.5%, respectively.
If I'm right, and the company misses the second half, investors will look to the company management and the board of directors to straighten out the mess. How can investors have confidence in the management team and board members when the company won't even post a photo of the board of directors on its Web site?
We've seen how corporate governance can really affect stock returns. Strong board members can accelerate growth by holding management's feet to the fire, as happened with Darden Restaurants (DRI). But a dysfunctional board, like the one at Yahoo (YHOO), can hurt the performance of the company over time.
I hope these mysterious people make themselves known to the investment community before the company reports the July quarter. If not, Lululemon will hurt its creditability with investors.
