But should investors give up on the yoga chain? Hardly. Here are two reasons to stick with the stock.
Buying opportunity
Last quarter, Lululemon Athletica inc. (NASDAQ:LULU) announced its much publicized recall of black Luon pants because new shipments didn’t meet the company’s standards for ‘sheerness’. The mishap could cost the company as much as $67 million and the result was a pun-filled bonanza for the media.
“Lululemon stock drops as yoga pants expose problems” — Reuters
“Yoga-Pants Supplier Says Lululemon Stretches Truth” — The Wall Street Journal
“Sheer Lululemon pants would sell, say cheeky observers” — CBC
“Yoga Pants Reveal Lululemon Shortcomings” — The Financial Times
Laughs and giggles aside, investors should note that Lululemon Athletica inc. (NASDAQ:LULU) practiced textbook crisis management during pants fiasco by 1) quickly bringing the issue to the public’s attention 2) being upfront and honest with the media, customers, and investors, and 3) holding someone accountable by firing the chief product officer Sheree Watson.
All of these actions should only strengthen customer and investor trust in the company.
Most of the recent news suggests this product issue is a short-term hiccup in a otherwise great story. Lululemon Athletica inc. (NASDAQ:LULU) recently announced that it will be able to fully replenish its inventories by the spring, much earlier than the July/August time-frame previously forecasted. The company is also working to strengthen its relationship with suppliers.
In hindsight, investors will look back on this issue as a great buying opportunity.
Long growth runway
Product issues aside, nothing has changed regarding the company’s growth story. Lululemon Athletica inc. (NASDAQ:LULU)’s earnings are being driven by four factors:
United States: The company has 135 stores in the U.S. with room to double or triple that figure.
International: Lululemon only has only 25 stores internationally in Australia and New Zealand. New markets like the U.K., Europe, Japan, Hong Kong, and Singapore remain completely untapped. This could be a bigger story than the U.S.
eCommerce: The company’s eCommerce channel posted 89% sales growth in 2012 and poised to deliver comparable numbers this year.
New Product Lines: Lululemon is also expanding into men’s apparel, children’s clothing, and cycling gear.
Of course, there are challenges to Lulu’s dominance.
Under Armour Inc (NYSE:UA) is trying to take advantage of Lululemon Athletica inc. (NASDAQ:LULU)’s recent problems to steal market share in the yoga apparel space. Last month the company launch a marketing blitz with the tagline ‘We Got You Covered’. Under Armour Inc (NYSE:UA) is aggressively undercutting Lululemon’s prices by 20%-30% and have expanded quickly by taking advantage of its well established distribution channels. The efforts are paying off. The company has reported 25% revenue growth in their women active wear segments.
Could these big rivals out-muscle Lululemon Athletica inc. (NASDAQ:LULU)?
Historically, cheaper alternatives have done little to faze the company’s core customer. Back in 2009, Target Corporation (NYSE:TGT) and Victoria’s Secret entered yoga apparel at significantly lower price points. The bears cried “margin compression!” but the competition had no noticeable impact on Lululemon’s financial results.
Foolish bottom line
The real benefit of Lululemon Athletica inc. (NASDAQ:LULU)’s PR problems: the stock’s valuation is back in-line with industry peers. Lululemon now trades at a 28 forward earnings multiple. With earnings projected to grow 25% next year, the stock sports at a reasonable 1.1 PEG ratio.
Investors shouldn’t let the pun filled headlines scare themselves out of an otherwise great growth story.
The article 2 Reasons Investors Should Stand Behind Lululemon originally appeared on Fool.com.
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