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Lululemon Athletica: Will 2015 Finally Be Its Comeback Year?

By Dan Caplinger - Jan 7, 2015 at 11:15AM

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The yoga-apparel specialist languished throughout much of 2014, but late in the year, lululemon started turning things around. Will the good times continue?


Source: lululemon athletica.

Yoga-apparel specialist lululemon athletica (LULU 1.49%) was one of the darlings of Wall Street for years, with its lucrative niche producing lightning-fast growth and impressive profitability. Yet all it took to bring all that crashing downward was a quality-control incident that resulted in the recall of one of its premium products, and lululemon proved incapable of quickly extricating itself from the ongoing fallout from the mistake. After falling more than 22% in 2013, lululemon hoped to turn things around last year, and even though 2014 brought further overall losses of around 5%, the stock performed quite well during the last two months of the year. Let's take a closer look at lululemon athletica to see whether the recovery is alive and well.

Stats on lululemon athletica

Average stock target price

$52.60

Full-year fiscal 2014 EPS estimate

$1.78

Full-year fiscal 2015 EPS estimate

$2.04

Full-year fiscal 2014 sales growth estimate

11.8%

Full-year fiscal 2015 sales growth estimate

14.2%

Forward P/E

27.2

Source: Yahoo! Finance.

Why investors are still unsure about lululemon
As you can tell from the target stock price, professional investors could hardly have lower expectations for lululemon's stock. The average target implies that Wall Street's finest expect lululemon to drop from current levels by about 5%, making 2015 the yoga retailer's third straight losing year. By contrast, shares of competitors Under Armour (UAA 1.83%) and Nike (NKE 1.73%) soared last year as they successfully took advantage of lululemon's miscues and increased their appeal in the women's apparel area.

That pessimism stems largely from the unexpectedly difficult time lululemon has had in bouncing back from its yoga-pants debacle in early 2013. Rather than simply admitting its mistake and making every effort to make up for it with customers, lululemon engaged in a long series of counterproductive moves, culminating in founder Chip Wilson's blaming the body shape of its customers for the shortcomings of some of the company's products. Even worse, internal bickering within lululemon's corporate ranks distracted the retailer from focusing its attention on its customers. As a result, many of the once-loyal members of lululemon's customer base deserted the retailer, and since then, those following the stock have increasingly had doubts about whether the company will ever win those customers back.


Source: lululemon athletica.

Yet investors have taken lululemon's latest turnaround efforts to heart, and the rebound in its share price since the end of October has inspired some hope among longtime shareholders. In early December, lululemon reported its fiscal third-quarter results, and overall revenue gains of 10% and positive comparable-store sales growth of 3% built a case that the worst might be coming to an end for the retailer. Admittedly, net income fell 8.5%, but lululemon boosted its adjusted earnings guidance for the full year despite having to endure a weak Canadian currency and its corresponding downward impact on revenue estimates.

Still, the big question is whether lululemon's efforts come too late for the company to realize its full potential. Already, Under Armour, Nike, and other players in the athletic apparel space have boosted their exposure to the women's side of the business. Innovative new products demonstrate the greater marketing presence that both of lululemon's competitors have, and they threaten to overwhelm any response that lululemon might eventually make. At the same time, lululemon won't have the benefit of the doubt from many of its current and former customers with a new product launch, and it will have to convince shoppers from scratch about any new commitment lululemon chooses to make toward producing the high-quality goods that allowed the yoga-apparel specialist to enjoy such impressive profit margins for so long.

The fact that lululemon athletica cut its losses so much by the end of last year was a big shot in the arm for long-term investors who are bullish on the company's prospects. Given the success that competitors have had in the women's fitness space, lululemon still has a huge opportunity ahead of it, and the real question is whether it can put the past couple of years behind it for good and move forward with new high-quality products that will bring customers back in the door. If lululemon athletica can shine up its tarnished reputation, then 2015 could finally give shareholders the gains they've longed to see for years.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica, Nike, and Under Armour and owns shares of Nike and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Lululemon Athletica Inc. Stock Quote
Lululemon Athletica Inc.
LULU
$321.69 (1.49%) $4.71
Under Armour, Inc. Stock Quote
Under Armour, Inc.
UAA
$10.03 (1.83%) $0.18
NIKE, Inc. Stock Quote
NIKE, Inc.
NKE
$116.07 (1.73%) $1.97

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

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