Lululemon Investors Caught With Their Pants Down, Now What?

| About: Lululemon Athletica (LULU)

Shares of Lululemon Athletica (NASDAQ:LULU) got spanked -- no pun intended -- after Monday's close. The stock had reported earnings and by most standards when investors look at just the after-hours quote, you would have assumed that the company either missed estimates or provided some pretty ugly guidance.

Well, neither of those two things happened. In fact, it was the opposite that happened. Lululemon beat on both the top and bottom lines when it reported its first quarter results. It also posted second quarter guidance well above what analysts had expected and raised its annual guidance for the year. The real trigger in this violent sell-off was from a management shakeup.

CEO Christine Day announced that she would be stepping down from her role, but will remain in the position until management finds a replacement. The 20% haircut on share prices over the next two trading days were a complete overreaction in my opinion. While Day was a great leader who steered the Canadian apparel maker through tremendous stages of growth and through the see-through pants issue, I don't think she was worth the amount of premium that was sliced out of the stock after the earnings report.

(Click to enlarge)

(Chart) Courtesy of

It's important to remember this one thing throughout this situation: There's nothing wrong with Lululemon! Day was a great leader and did a terrific job at the helm. But with that being said, there is nothing wrong with the company from an operational standpoint. Lululemon will continue selling products, it will continue its international expansion, and by all assumptions it will continue to grow impressively.

It's obvious that Day and the rest of the board thought the solid earnings beat and healthy guidance would lessen the blow of her departure. In hindsight, it's obvious that it did not. Here's what Day had to say regarding her departure:

"Plans have been laid for the next five years and a vision set for the next ten. Now is the right time to bring in a CEO who will drive the next phase of Lululemon's development and growth. I will continue to actively lead the organization while the Board searches for a new CEO, and will work to ensure a smooth transition."

That's everything you want to hear in a situation like this! The CEO is not being fired, she's not leaving on bad terms or over a failed business situation. No, she's stepping down for personal reasons and has assured investors that the groundwork for continued, sustainable growth is planned for the next five years.

Considering that the stock market (in general) is forward looking by about six months, five years of continued strong growth seems pretty legit in my mind. To me, the sell-off is really just part of the shock factor. No one was expecting Day to step down -- except, maybe the one executive who was selling ahead of the event -- and it just took everyone by complete surprise.

Bill Maurer wrote an excellent article about Lululemon and the overreaction regarding Day's departure. In it he detailed Lululemon's ability to consistently beat the guidance that it sets from the previous quarter. I suggest reading it for a fantastic overview of the company's earnings ability.

With that being said, the company has guided for second quarter revenues in the range of $340 million to $345 million and earnings per share between $0.33 and $0.35. This goes well above the $328 million in revenues and slightly above the $0.33 in earnings per share that analysts were looking for. Still, it did not matter at the time.

While we did see margins shrink a bit, revenue growth continues to remain robust. Below is table that highlights the revenues, along with the year-over-year change since 2010:


Revenue (In Millions)

Year-Over-Year Change (%)













Figures taken from Google Finance.

As you can see, the company has continued to grow sales at a strong rate and Day has already highlighted that everything is laid out for the next five years. Obviously plans change and there is an occasional misstep here and there, but overall, Lululemon is expected to be dependable for shareholders in the eyes of the management team.

The company competes with the likes of Nike (NYSE:NKE), although it trades at far cheaper valuations. With the drop, Lululemon now trades with P/E ratio of about 34, compared to that of Nike which has a P/E ratio of roughly 24. Of course, Lululemon is still valued more richly than that of Nike, but the growth is much stronger, so that makes sense.

However, when you compare Lululemon to Under Armour (NYSE:UA), then it would appear that the latter trades at a much higher premium than the former. Under Armour has similar revenue growth figures (although stronger earnings per share growth), but trades with a much higher P/E ratio at 52. Below I will post a similar chart to the one above, outlining Under Armour's revenue growth.


Revenue (In Millions)

Year-Over-Year Change (%)













Figures taken from Google Finance.

As you can see, Under Armour has a growth level more in-line to that of Lululemon. But due to the shellacking that shares took this week, Lululemon now trades at a much lower valuation. This offers both value investors and growth investors an opportunity to enter the stock.

I would certainly suggest dipping your toes in the water if you have been watching shares from the sidelines. Despite the bounce we saw Thursday, I believe that below $65 offers intermediate-term buyers a great opportunity to make some money.

Better yet, long-term investors have an amazing window to grab to some shares at a now, much lower valuation. For a stock that grows as quickly as Lululemon, share prices will not likely remain this low for long. I would think that investors who were previously long the stock have hopefully added to their position on the recent selling.

Remember, this is a management change. There is nothing wrong with the company and everything (from what we know) is still intact. The vision, the growth and the opportunities are all still there. Day is just, well, calling it a day. You can thank her in a few months for giving shareholders one last discount to the share price.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.