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I wrote an article on Luluemon (NASDAQ:LULU) back in April right after the company was quickly trying to recover from the unfortunate recall that it experienced due to the sheerness of its pants. The recall cost the company almost $17.5 million dollars, sent the stock down, and decreased overall profit margins. Yet, under the leadership of Christine Day the company was able to appropriately manage this mini-crisis and get the stock and reputation of the company back on track.

Fast forward to June 10, when the company announced first-quarter earnings of $0.32 per share against the consensus estimate of $0.30, net income of $47.3 million, and gross margins of 49.3% (lower due to the recall). Not terrible numbers for the quarter, especially considering what happened during the quarter. Along with the financial update also came an announcement from CEO Christine Day, stating that she would be stepping down from the position of CEO for personal reasons and a new CEO (to be determined) would be replacing her. The street did not look favorable upon this news and the next day gaped the stock down almost $15 per share, representing a 17.5% price decrease in one day. Prior to the announcement the stock had been trading for around $81 per share with a 52-week high of $82.50. Currently the stock trades for $63 - $64 per share.

Since the massive one day sell-off the stock seems to have found new ground in the low $60s, where I think it will continue to stay until additional news is released on whom the new CEO will be and when the official transition of leadership will happen. Prior to the announcement Lululemon was trading with a fairly high multiple of 44. Even after the recent sell-off of the stock it still maintains a high multiple of 34. I will say though that its current multiple is a little more in line with the multiples of its peers. Below is a chart that compares Lululemon to some of its main industry competition, Nike (NYSE:NKE), Adidas (ADS.DE ), Under Armour (NYSE:UA), and GAP (NYSE:GPS).

Lululemon

Nike

Adidas

Under Armour

GAP

Stock Price

$63.40

$61.50

$79.00

$58.25

$41.05

EPS

1.85

2.52

2.60

1.14

2.57

P/E

34.30

24.44

30.33

51.22

15.99

Market Cap

9.16 B

54.96 B

16.52 B

6.12 B

19.18 B

Gross Margin

49%

44%

8%

46%

41%

Operating Margin

27.04%

11.95%

7.99%

10.29%

13.12%

Revenue Growth

21%

9.40%

-1.90%

22.70%

6.90%

Book Value

$8.26

$11.94

$27.45

$8.03

$6.87

Free Cash Flow

186 M

$1.95B

772.4 M

$143.8 M

1.25 B

Debt/Equity

No Debt

3.01

22.43

7.17

39.45

There is no question that Lululemon is a growth stock and growth story. The question that concerns the street and investors is whether Lululemon will continue to be that growth story even under new leadership? I say yes it will be and below I state three main reasons why this current stock correction has gotten a bit overdone.

· Nothing fundamental has changed regarding the quality or demand for these products. I understand that leadership is very important, but if demand remains constant and the company is able to expand into new markets like Canada, Germany, and London (which it plans to do), there is no reason why profitability will not continue to grow.

· The company still maintains its strong capital structure and position. On the most recent balance sheet the company had $930 million in equity, $588.4 million in cash, and no debt. The biggest item in its liabilities was accrued liabilities, booked at more than $38 million in May 2012. Looking forward, Lululemon stated that it expects to generate $1.64 - $1.66 billion in revenue, with a full-year EPS range of $1.96 - 2.01 for 2013.

· Is new leadership really something that should be feared? Christine Day has done a spectacular job over the last 5.5 years in making this company into an athletic apparel juggernaut, but maybe it really is time for the company to have some fresh blood in the leadership position, especially as the company expands into new international markets. I don't see new leadership as a bad thing for shareholders. Take Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) for example. Both have had leadership changes in the past few years and both have taken their respective stocks to new all-time highs.

I view the recent sell-off in the stock as a major over reaction and an excellent entry point. Now, I will be the first to admit that Lululemon at this current price point certainly does not present some great undervaluation, but what Lululemon does offer at this price is an opportunity to capitalize on some fast money. I think that once some additional clarity is shared with the street on who the new leader will be and what the transition plan will look like the street will resume viewing this stock as a growth play and revalue it back into the $70 per share range.

I suggest a price point in the $70 range because I don't feel that the street is currently considering everything the company currently has going for it; strong financials, above-average industry profit margins, and strong future growth prospects, none of which is currently baked into the current valuation of the company. All the street is concerned with right now is the uncertainty of leadership change and until clarity is brought to the table the street will continue to price this stock as if demand, margins, and quality have completely dried up.

As the stock continues to decrease in price I would be a buyer of more shares in the $60 - $62.50 range and I am confident that the company will continue to move forward in a positive direction, even with a new leader, and the stock will once again reflect that. It's just going to take some time and more information for investors to start getting comfortable again.

Disclosure: I am long LULU, AAPL. 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.

Source: Is Lululemon Really Dead Money Or A Diamond In The Rough?