LULU: Caught With Its Pants Down

 | Mar 19, 2013 | 9:03 AM EDT
  • Comment
  • Print Print
  • Print
Stock quotes in this article:


After the close Monday, lululemon athletica (LULU) cut guidance after disclosing a major manufacturing defect in some of its women's yoga pants would cause them to be too revealing. While everyone had a good laugh over the "level of sheerness" comments in the press release, I was more interested in the company's guidance. Should the stock sell off in a meaningful way, this could be a great opportunity to get into the shares of a terrific company.

Management said that had pants not been defective, the company would have reported an 11% increase in same-store sales. But because of the defective merchandise, same-store sales would likely be reduced to a 5% to 8% increase. Management reduced first-quarter guidance from an expected range of $350 million to $355 million to a range of $333million to $343 million. At the midpoint of guidance, it works out to about $14 million to $16 million in lost sales. While it may take a quarter or two for the company to restock its selection, the reality is a $15 million hit is only 1% of the company's estimated annual revenue of $1.37 billion.

Even if the pants shortage lingers for a few quarters, it's hardly a disaster. LULU's next earnings report is before the market open on March 21 and I expect management to provide more color on the extent of the manufacturing problems. If it's a relativity small problem, you have a great opportunity to get into a terrific retailer.

With Monday's announcement, shares tumbled almost 8% in premarket trading to $65.90. That's like a $950 million reduction in the company's market cap because of a problem that's about 1% of its business. LULU would be a good buy if the stock fell below $65. Problem is, many other people are thinking the same way and it would be unlikely for the shares to collapse down into the mid $50s (where it would be a good buy).

It's hard to find a retailer that reports same-store sales in double digits, has a fanatical fan base and isn't being knocked off by less expensive brands or the Internet. Given LULU's fan base, I expect the company to make the lost sales up in the back half of the year, anyway. While sheer yoga pants are an embarrassment, this downward dog should be moving higher soon enough.

Columnist Conversations

Foot Locker's (FL) less than expected quarterly earnings set off a round of selling the entire athletic appare...
View Chart »  View in New Window » Gold has met the first upside target off the last setup zon...



News Breaks

Powered by


Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.