Sometimes, the short-sightedness of the market is astounding. Yesterday's downgrade of lululemon athletica (Nasdaq: LULU) by FBR Capital Markets, and the subsequent 6% dip in the company's stock, serves as our most recent example.
What happened?
It has already been well-documented that lululemon is having inventory problems. But unlike inventory issues at competitors Under Armour (NYSE: UA) or Nike (NYSE: NKE), lululemon's products are flying off the shelves faster than the company can up supply. If a company is going to have inventory problems, these are the good kind to have.
So it was somewhat surprising that FBR analyst Liz Dunn stated, "The stock appears priced to perfection and we believe any glitch on earnings could result in a sell-off." She she also said that margins will be pressured because of costs.
Here's what's wrong with this:
- We already know that supply will start to meet demand in the second half of this year. The company has already said so. When that happens, there should be a pop from the built-up demand.
- A stock's price falling because of the possibility of a "glitch" seems odd given that whatever the "glitch" may be, it's most likely temporary.
But my biggest beef with this report comes from Dunn herself, who states, "We believe Lululemon will move to preserve quality at the expense of margins. While this is absolutely the right thing to do in the long term, in the near term the margin ramifications may pressure the shares." (Emphasis added.)
But lululemon has been firing on all cylinders for the past year, with the bottom line improving over 100%, and an average earnings beat of 27.5% in 2010. All of this with the company only having opened just 86 full-service stores in North America -- so it has plenty of room to expand its store count in the coming years.
We at the Fool have been pounding the table for years saying that investors need a three- to five-year outlook on companies they invest in. Our flagship newsletter, Stock Advisor, has shown just how effective this long-term view can be. Over the past nine years, its average pick is trouncing the market by a remarkable 90%. To get a free 30-day trial of Stock Advisor, simply click here. In the meantime, add lululemon athletica to your scorecard to keep tabs on how it's improving its long-term prospects.
