We here at The Motley Fool are largely buy-and-hold investors. So when I came across a downgrade report by FBR Capital Markets on lululemon athletica (Nasdaq: LULU) last month, I couldn't help but pen an article titled "Just Another Example of Wall Street's Stupidity."
Now it's only a month later, but so far investors who followed FBR analyst Liz Dunn's advice have been burned badly. The stock is up 31% since late May versus a market return of less than 1%.
So what happened?
It had been well-documented that lululemon was having some inventory problems coming into the latest quarter. But unlike too much inventory at competitors Under Armour (NYSE: UA) or Nike (NYSE: NKE), lululemon's products were flying off the shelves faster than the company could supply them. If a company is going to have inventory problems, these were the good kind to have.
Well, earnings came out last month above expectations. Not only was lululemon able to meet more demand than expected, but it was able to avoid margin compression not by raising prices, but by simply offering fewer discounts than it has in the past.
Moving forward, the future looks brighter than ever for the company. lululemon is a member of a very profitable niche of consumer goods companies that offer high-priced, high-quality products to high-end customers. Investors in lululemon, as well as fellow niche mates Deckers (Nasdaq: DECK) and Coach (NYSE: COH), have been rewarded quite handsomely over the past year. All three companies are making moves overseas, so the runway for growth is still present.
A difference in perspective
Although this sounds a bit like tooting my own horn, that opinion would miss the bigger point. I have been wrong about stocks many times in the past, and I will be in the future as well. Of that I'm sure.
Rather, take a look at what Dunn had to say when downgrading the stock: "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.)
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