I'm usually a pretty humble guy. But in this case, I can't help myself as I come out with a big fat "I told you so."
lululemon athletica (Nasdaq: LULU) saw a pretty fierce sell-off on Thursday morning, after the company reported earnings that registered a top-line revenue miss compared with the consensus estimate. Another issue that came up was that the yoga guru's inventory balance on its books soared by 77%.
One of the analysts in particular, KeyBanc's Edward Yruma, had highlighted the inventory concerns along with slowing comparable stores sales and reiterated his "Underweight" rating on the stock. I brushed off the inventory concerns as actually the right thing to do, given the inventory shortages that lululemon has been facing all year. Adding more inventory in time for holiday shopping to help lulu followers get their fixes sounded like a great idea to this Fool.
Well, we lululemon shareholders got some vindication yesterday. Yruma has entirely reversed his stance on the stock and has now upgraded it all the way to a "Buy" and assigned it a price target of $58. He met with CEO Christine Day and CFO John Currie and now sees the inventory jump as a positive sign, just as I do.
Yruma added that the company "has been chronically underinventoried" and that "better in-stock levels could drive an incremental $0.13 in EPS over the next 12 months." He points out that more inventory can drive operating profit at outlets while lululemon continues to expand its men's offerings. He also makes comparisons with Coach (NYSE: COH), another women-centric luxury retailer, and its opportunity to serve an untapped masculine area of growth.
Two other analysts also followed up the results with "Buy: upgrades: Janney Montgomery Scott and Barclays with price targets of $57 and $58, respectively.
Now really is a good chance to pick up shares given the recent weakness. I think it's a better pick than rival Under Armour (NYSE: UA) for multiple reasons. Yesterday's high of $50.32 shows a gain of 21% compared with Thursday's low of $41.70, which is quite a turnaround in two days. Even with the recent days' wild ride, it's still not too late to pick up this official Motley Fool Rule Breakers recommendation.
Add lululemon athletica to your Watchlist. And sign up for a free trial to Motley Fool Rule Breakers to see why lululemon may deserve a spot in your portfolio.
