Settle Down, Folks: Lululemon Is Doing Fine

With all the negative commentary surrounding lululemon athletica (NASDAQ: LULU  )  lately, I wouldn't blame you for thinking the yoga apparel specialist was spiraling downward into obsolescence.

And from an investor's perspective, I'll be the first to admit that all that pessimism can be absolutely terrifying. But before you go scrambling to hit that "sell" button, I've got news for you: Lululemon is doing just fine.

Lululemon store in Lincoln Square, New York City. Source: Lululemon.

Here's how we got to this point
Before we delve into why, it helps to consider what brought us this far.

In all fairness, Lululemon shareholders have endured one heck of a roller-coaster ride in 2013, en route to a nearly 11% year-to-date loss.

If that weren't bad enough, anyone who stuck to an index fund mirroring the S&P 500 this year has been treated to a 28% gain. That's 39% percent of painful underperformance, folks.

LULU Total Return Price Chart

LULU Total Return Price data by YCharts.

To be fair, despite weakness caused by a massive recall involving around 17% of all bottoms sold in Lululemon's stores back in March, things were looking great until early June, when the stock unraveled after Lululemon's popular CEO of more than five years, Christine Day, abruptly announced her resignation pending the company's ability to find a suitable replacement. Incidentally, that still hasn't happened, and it appears Day will remain at the helm at least long enough to steer the company through 2013's all-important holiday season.

Then in September, Lululemon stock plunged again after it warned the effects of March's recall would likely persist through the end of the year. That's when I decided enough was enough, and made my first-ever purchase of Lululemon stock in my personal portfolio.

But Lululemon wasn't done yet; only two weeks ago, company founder and chairman Chip Wilson made some inflammatory comments in a Bloomberg interview, responding to complaints of pilling in their products by saying, "Frankly, some women's bodies just actually don't work" for the clothes, and "It's really about the rubbing through the thighs, how much pressure is there over a period of time, how much they use it."

Yikes. There's nothing quite like narrowing your customer base through inadvertent insults.

Why this, too, shall pass
While we Fools generally take analyst upgrades with a grain of salt, I think a note from Credit Suisse yesterday underscores why the market may be missing the forest for the trees.

Remember, a couple of months ago Lululemon told us the recall's fallout caused late deliveries of its fall products, leaving the company with summer product still on the floor through all of August.

Now, Credit Suisse says, based on its updated analysis of more than 4,000 SKUs on Lululemon's website, it would appear persistent inventory issues stemming from the big recall are finally being resolved. I suppose it makes sense, then, why CFO John Currie in September insisted that "there's no reason to change my longer-term outlook on the 55% gross margin and 25% operating margin." 

But while that would effectively mark the end of Lululemon's current recall woes, what of its lack of a CEO and those pesky, politically incorrect comments spouted by Wilson?

For the former, look no further than fellow athletic apparel specialist Under Armour (NYSE: UA  ) -- another stock I happen to own and love -- which itself was struggling around this time last year thanks both to bouts with management turnover and worries surrounding whether its new footwear offerings could compete with Nike's formidable multibillion-dollar shoe business.

Though Nike stock was certainly no slouch over the past year, keep in mind I also pointed out recently that Under Armour investors willing to take advantage of the downturn were rewarded handsomely for their patience. This time around, I'm convinced the same rewards are in store for long-term Lululemon investors, especially considering Lululemon's plans to grow its enormously efficient branded store base by around 20% over the next year.

And as for Wilson? Let's just say this isn't the first time Lululemon's founder has had to weather the backlash of his own less-than-savory commentary. As it stands, that hasn't stopped his massively profitable company from returning more than 1,500% for investors over the past five years alone.

Now that doesn't make Wilson's recent comments any less offensive, and certainly doesn't mean he's done Lululemon any favors. But I sincerely doubt it will cause a massive number of Lululemon's fiercely loyal customer base to defect to other brands. 

Foolish takeaway
To be sure, though, some of them will. In fact, last week Under Armour founder and CEO Kevin Plank took to Bloomberg along with skier spokeswoman Lindsey Vonn to point out "Under Armour is designed for all shapes." They've certainly got a point, but I still think the market's underestimating just how little time it takes for otherwise-solid companies to bounce back from this kind of adversity.

In the end, whether you love or loathe Lululemon, it's faring much better than today's headlines imply.

It's here! Our top stock for 2014
While some people got hurt buying underperforming stocks (like Lululemon) early this year, the market's huge gains across 2013 also left investors who remained on the sidelines burned. However, opportunistic investors can still find huge winners. The Motley Fool's chief investment officer has just hand-picked one such opportunity in our new report: "The Motley Fool's Top Stock for 2014." To find out which stock it is and read our in-depth report, simply click here. It's free!

 


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