Back in March, shares of lululemon athletica (NASDAQ:LULU) fell by as much as 8% in a single day after the company announced an enormous recall involving black yoga pants which were... ahem... a little too sheer for its customers' liking.
It certainly wasn't the company's first rodeo; over the previous year, Lululemon had already dealt with three other quality-control incidents, with one involving bright colors bleeding and two other cases of too-transparent clothing.
However, I remained convinced at the time that Lululemon would be just fine, especially considering they admirably didn't hesitate to nip this one in the bud -- even though they knew the resulting recall would potentially reduce total revenue for the quarter by as much as 3%. Meanwhile, the company also warned that same-store sales would potentially drop from around 11% closer to between 5% and 8%.
Back in (solid) black
Sure enough, shares of Lululemon have steadily risen nearly 28% since then, easily outpacing the S&P 500's 5% return over the same period:
Now, a little over over two months after the initial recall, Lululemon customers are gradually seeing the popular pants in question -- which came from the company's Astro and Groove yoga lines -- finally coming back to store shelves this week.
Going even further, according to a company blog post last Friday, they've taken the opportunity to completely "re-engineer [the] luon bottom patterns in each and every style to minimize the stretching of the fabric."
At the same time, the post also encouraged consumers to make sure they wear properly fitting pants to avoid any unnecessary embarrassment. Why? Because "luon is a knit fabric -- if you stretch a knit fabric far enough, it will go sheer."
Luckily, the entire debacle happened to occur just before Lululemon announced its fourth-quarter earnings, giving the company the opportunity to properly adjust investors' expectations according to reality by providing fresh guidance during its earnings conference call.
More specifically, after accounting for lost revenue between $12 million and $17 million and a negative impact on earnings per share of about $0.11 to $0.12 from the Luon issue, Lululemon expects first-quarter revenue to be in the range of $333 million to $343 million, and diluted earnings per share between $0.28 and $0.30.
Even so, while this quarter's results may be a bit thin, remember that the company has still managed to remain incredibly profitable, and has more than $590 million in cash with no debt on its balance sheet.
On one hand, that's why I'm still convinced Lululemon stock should continue to prove a solid investment for patient long-term shareholders who buy now.
On the other hand, keep in mind that Lululemon is all set to announce first-quarter earnings on Monday, and you can be sure everyone will be looking for any signs that the negative effects of the recall won't carry forward. If there's any indication otherwise, shares of Lululemon could easily experience a steep -- albeit temporary -- pullback. If that happens, I'll be seriously considering opening a long position of my own.