Lululemon Unravels: Should You Buy Now?

Last week, I debated whether shares of athletic apparel specialist lululemon athletica (NASDAQ: LULU  ) were a buy leading up to the company's first-quarter earnings report.

On one hand, I noted, the company had resolved the quality-control issues related to its too-sheer pants recall in March, and Lululemon had taken the opportunity to properly adjust investors' expectations with realistic revised guidance. In addition, the company told investors it would remain solidly profitable and had $590 million on its balance sheet with no debt at the end of last quarter.

On the other hand, with regard to earnings, I also wrote, "You can be sure everyone will be looking for any signs that the negative effects of the recall won't carry forward. If there's any indication otherwise, shares of Lululemon could easily experience a steep -- albeit temporary -- pullback."

The numbers
Sure enough, shares of Lululemon plummeted to the tune of 17% during intraday trading Tuesday, but not for the reasons I expected. First, though, let's talk numbers.

For the fiscal first quarter ended May 5, 2013, Lululemon reported net revenue growth of 21% to $345.8 million, beating both its own guidance (which called for sales between $333 million and $343 million) and analysts' estimates of $341.4 million. Comparable-store sales also increased by 7% year over year on a "constant dollar basis," or near the top of Lululemon's guidance of 5% to 8%.

Next, earnings per diluted share came in at $0.32, once again beating the $0.30-per-share earnings called for by both Lululemon's previous top-end guidance and analysts' average estimates. 

Finally, Lululemon provided reasonable second-quarter guidance, telling investors to expect revenue between $340 million and $345 million, and diluted earnings per share from $0.33 to $0.35. In addition, Lululemon raised both its full fiscal-year 2013 revenue and earnings guidance to ranges of $1.645 billion to $1.665 billion and $1.96 to $2.01, respectively. Previously, Lululemon had told investors to expect full-year 2013 revenue of $1.615 billion to $1.640 billion, with earnings per share from $1.95 to $1.99.

So what happened?
While the company's first-quarter results and forward guidance were both solid, the market was shocked to learn that Christine Day, Lululemon's CEO of more than five years, will step down from her post as soon as a successor is found.

Day stated the following:

Being a part of lululemon for the past five and a half years has been an incredible journey. I am proud of building a world class team that has produced one of the best growth, brand and profit stories in retail. Plans have been laid for the next five years and a vision set for the next ten. Now is the right time to bring in a CEO who will drive the next phase of lululemon's development and growth. I will continue to actively lead the organization while the Board searches for a new CEO, and will work to ensure a smooth transition.

With that, I could almost sense jaws dropping all across Wall Street as they furiously bid the stock price down. After all, under Day's leadership, Lululemon's stock has risen more than fourfold, and revenue has grown at a staggering 39.3% annual clip for the past five years straight. Meanwhile, earnings grew at an even more impressive 57.3% annual rate over the same period, and the company's global growth story has only just started to unfold.

Of course, Day didn't provide a specific reason in that statement for her departure, so investors couldn't help but wonder whether she was forced out as a result of the company's fourth -- and most significant -- quality control issue over the past year. 

Unsurprisingly, then, an analyst at Goldman Sachs wasted no time asking Day to elaborate on her stepping down during the Q&A portion of Lululemon's earnings conference call, to which she replied: "OK, this was the personal decision of mine, and look, it's never the perfect time to leave a company that you love. ... And now as the company embarks really on that next 10 years vision, the timing is right to bring in a new person to lead, and I have complete confidence in the succession planning process."

Once again, she didn't tell us exactly why she's leaving, but at least she indicated she wasn't forced out of her position. Instead, she intelligently emphasized the fact she did her best to set the company up for success over the next decade.

Foolish final thoughts
And you know what? Regardless of who's leading Lululemon, I believe Day when she says the company will be able to succeed over the long run.

In the end, with the lessons learned from its last recall, and supported by its strong brand and fiercely loyal customer base, there's every reason to believe Lululemon will be able to continue translating its past successes to continued growth across the globe. As a result, I'm convinced today's pullback will prove a fantastic buying opportunity for patient long-term investors.

Lululemon has the potential to grow its sales by 10 times if it can penetrate its other markets like it has in Canada, but the competitive landscape is starting to increase. Can the company fight off larger retailers and ultimately deliver huge profits for savvy investors? The Motley Fool answers these questions and more in its most in-depth Lululemon research available. Thousands have already claimed their own premium ticker coverage; gain instant access to your own by clicking here now.

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  • Report this Comment On June 11, 2013, at 4:28 PM, petergrynch1 wrote:

    I like their earnings and future profits so much, I picked up a July $65 call option. I may buy more tomorrow if there is any follow-through selling tomorrow. People will kick themselves for dumping at today's price.

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