Is Lululemon Too Hated Right Now?

In a change of pace from my normal analysis of retailers, I occasionally find it beneficial to study how the investing community perceives companies. The results are usually very interesting and can reveal long-term buying opportunities.

Lululemon Athletica (NASDAQ: LULU  )  has been hit with a seemingly endless wave of bad news, and its shares have plummeted in recent months. However, it is at such times that savvy investors need to stop, take a breath, and survey the situation.

The main problem
In several previous articles, I have focused on the major problems that Lululemon is facing going forward. The most notable one is a current lack of business diversity that stems from the company's over-reliance on female consumers.

While Lululemon has built up incredible brand popularity among its core yoga audience, this success now seems to be working against the company. According to a 2012 study by Yoga Journal, over 80% of people who practice yoga are female. Not surprisingly, early last year Lululemon estimated that it derived a staggering 88% of its revenue solely from female consumers. 

While management at Lululemon has started to cater more to male consumers with the planned addition of male-centric stores,  the process will take time and it could prove extremely difficult.

The company most likely won't be able to widen its male consumer base without adding new product segments. So far, management has not laid out a viable plan to extend Lululemon's product lines beyond yoga and running apparel. Lululemon's main problem is that it is still primarily a yoga company. Unlike competitors Under Armour and Nike, the yoga company's business is still very one-dimensional.

All is not lost
As the popular saying goes, "It is always darkest before the dawn." This could very well turn out to be true for Lululemon and its shareholders. History has certainly shown that buying rapidly growing companies amid serious corrections has proven a viable strategy.

So far, shares of Lululemon have fallen over 40% from their all-time-high price of $82.50. What's more is that nearly every article coming out on Lululemon seems to be a negative or skeptical one, and for good reason since the company is experiencing serious challenges. The constant negativity around Lululemon could be telling of a bottoming process.

It has happened before
Lululemon's current situation reminds me of several other such situations in recent years. In particular, Chipotle Mexican Grill (NYSE: CMG  ) and Netflix (NASDAQ: NFLX  ) both experienced similar corrections within the last several years that stemmed from serious growth concerns. Chipotle's growth came into question in mid-2012 when the company's same-store sales growth began to slow drastically. Shares of Chipotle proceeded to drop 45% in six months. Similarly and more drastically, in mid-2011 shares of Netflix plunged over 80% in just four months as the company's profitability and sustainability came under serious question.

Interestingly, in both instances the companies faced a myriad of other bad news events. For example, Chipotle had an embarrassing receipt-rounding scandal around the same time,  which only added fuel to the proverbial fire. Netflix also continued to make news for all the wrong reasons, which included the company forcing its customers to adopt new and unpopular subscription terms. 

These problems appear similar to Lululemon's current woes which stemmed from the company's disastrous 2013 recall of its see-through pants, which also led to the eventual resignation of CEO Christine Day.

Is a turnaround at hand?
The important takeaway here is that both Chipotle and Netflix have made remarkable comebacks lately that began with strong managerial decisions. The companies' stocks have also established new all-time-high share prices in recent months. Investors who had faith in both companies have no doubt profited immensely as a result. However, at the time all seemed bleak for the two companies, as it no doubt does now for Lululemon.

While it is prudent for investors to wait for confirmation that Lululemon's management can successfully diversify the company's business mix, Lululemon has the potential for a major turnaround in 2014 and investors should remain on watch.

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Read/Post Comments (3) | Recommend This Article (4)

Comments from our Foolish Readers

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  • Report this Comment On January 28, 2014, at 9:13 AM, rtekosky wrote:

    Similarities to CMG and NFLX are small. both cater to men AND woman, are not trendy, are not more expensive than their competition and still hold competitive advantages that LULU no longer has.

    This last year's numerous gaffes have taken care of that.

    If you are the most expensive, you must have superior customer service, (a huge tactical blunder on that policy decision).

    If you only cater to slim women (another incredible stupid statement)you've now only selling to 20% of all women, perhaps.

    And as for men, most men would rather buy a similar product from a company that wasn't a "women's brand) UA, Nike etc. Maybe in a yoga class they can core points.

    I own LULU as well and will try to get out soon using close to the money calls to pick up a few percentage points more.

    Worst case scenario? This stock could actually be bankrupt in a year or two if the party's over?

  • Report this Comment On January 28, 2014, at 2:49 PM, PhilipS wrote:

    Thanks for writing, if you read my previous articles on LULU you will see I agree with almost everything that you said. LULU management has significant work to do to diversify its business, if it even can at this point effectively. However, when all seems lost, it usually isn't and CMG and NFLX both experienced these types of events. Beyond that, you are right, the companies are ever different.

  • Report this Comment On January 29, 2014, at 12:03 PM, brightsideLP wrote:

    Simple answer to the title of your article.....NO.

    Its a fad. Its moat = 0. Competition will take the margins down to nothing. Its only a matter of when not if.

    Now lets look at what IT IS.

    6.7 Billion market cap.

    $600 million in cash.

    $6.1 Billion net valuation for the business.

    Net valuation = roughly 20 x earnings

    So this fad with no moat and increasing competition....has to maintain these current sales / margin levels for 20 years to cover the net valuation.

    I think it may make positive returns for another 1 - 2 years.

    Then its gonna be Lu-"who?"

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