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Lululemon Bounces Back

By Andrew Marder - Apr 24, 2013 at 5:00PM

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Product issues are slowly becoming water under the bridge, as investors swing back to the yogawear leader.

The market is overcoming its fears of lululemon athletica (LULU 2.15%), and the yogawear seller rebounded substantially in the first half of the week. Shares had been crushed in March when the company announced that due to a defect -- namely, a too-sheer fabric -- many of its yoga pants were going to come off shelves. The stock slowly inched back up, and by last week it had regained the initial losses.

This week, analyst action gave new confidence to investors, with at least one source, Camilo Lyon at Canaccord Genuity, estimating a quicker turnaround in product replacement than anticipated. On Monday, the stock rose 8% and then continued rising through Tuesday. Does this mean the worst is behind us (pardon the pun) and that it's clear sailing from here on out?

Lululemon gets lucky
First we need to acknowledge that if Lululemon is safe, it's due largely to failures at its competition. Its own product's failures were so joke-inducing yet serious that the news quickly caught on. Companies looking to increase yoga sales to women had a window of opportunity to jump in and make the most of the bad news, but most reacted too slowly.

In particular, Gap (GPS 4.32%), with its Athleta brand, and Under Armour (UAA 2.48%), which has been pushing for more sales to women, both missed the boat. By not focusing on their own products, or offering consumers a chance to try their alternatives, the companies lost the edge that Lululemon had handed them.

Even now, Athleta continues to highlight its swimwear line, which is infighting with both GapBody and Old Navy for customers. While Athleta's yoga products also risk some cannibalization, they offer the opportunity to gain a whole host of dissatisfied customers. Under Armour has been shooting for 50% of its revenue to be generated through women's sales for a while now, and it also sat by idle while customers waited for Lululemon to get its act together.

Lululemon executes when it counts
Lululemon's return to normal will also be a testament to management's ability to get through a crisis. The company has had product shortages in the past, and this looks like a much-better-managed turnaround than in those previous instances -- everyone seems to be learning.

The Canaccord analyst, who's expecting shelves to be stocked earlier than predicted, thinks that the turnaround should be helped by the fact that Lululemon's manufacturing partners still had raw material on hand when the recall came through. That means that they would be able to start fixing the quality issue immediately, rather than having to wait for new material to come in.

Finally, Lululemon's straightforward handling of the situation may reassure customers that it cares about its products more than other companies do. While one manager was lost in the fray -- Chief Product Officer Sheree Waterson left the company less than a month after the recall --there was very little public bad blood, and due to the semi-comical nature of the defect, it was easy to gloss over in the news.

While the stock is rising now, keep in mind that a lot of that bounce comes from the opinion of one analyst, who, like any analyst, is capable of being wrong. Cautious investors may want to forgo the gains that would be had from now until the next earnings report, just to keep themselves safe.

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Stocks Mentioned

Lululemon Athletica Inc. Stock Quote
Lululemon Athletica Inc.
$293.65 (2.15%) $6.17
Under Armour, Inc. Stock Quote
Under Armour, Inc.
$10.34 (2.48%) $0.25
The Gap, Inc. Stock Quote
The Gap, Inc.
$11.60 (4.32%) $0.48

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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