This Cramp Looks Short-Term

06/27/2013 9:45 am EST




This athletic apparel company is dealing with a couple of setbacks, but it still looks attractive, says Chad Fraser of Personal Finance.

Lululemon Athletica (LULU) released better-than-expected fiscal first quarter financial results, but the stock still plunged 17.5%. That's because the yoga apparel chain announced that CEO Christine Day will step down after five and a half years at the helm.

Lululemon's revenue rose 21%, to $345.8 million, from the same quarter a year ago. Comparable-store sales rose 7%. Net income edged up marginally, to $47.3 million from $46.6 million a year ago.

Earnings per share were flat, at 32 cents, on slightly more shares outstanding. But they beat on the top- and bottom-line: Analysts expected earnings of 30 cents a share on $341 million of revenue.

The company said it expects earnings for the current quarter of 33 to 35 cents a share on revenue of $340 million to $345 million, compared to the Street's expectation of 33 cents a share on $329 million of revenue.

For the full year, Lululemon expects revenue of $1.645 billion to $1.665 billion and EPS of $1.96 to $2.01—higher than the previous forecast of $1.95 to $1.99 a share on $1.615 to $1.640 billion of revenue.

Day's resignation comes at a delicate time. The latest quarter included an embarrassing defect in women's black yoga pants made from its proprietary Luon material. LULU pulled the affected products from its shelves, and also advised of a shortage of this particular style of pant, which it said represents 17% of all women's pants in its stores.

Chief product officer Sheree Waterson resigned shortly after the Luon problems emerged. The company said it expected the issue to reduce its revenue in the first quarter to $333 to $343 million, down from its previous forecast of $350 to $355 million.

Lululemon has responded swiftly to the situation, changing its quality control processes and putting employees in factories to monitor and test products.

On June 3, Canaccord Genuity analyst Camilo Lyon told the Associated Press that the situation shouldn't cause much damage to Lululemon's brand, and the company should see a sales lift in the current quarter due to pent-up demand. He cut his price target to $87 from $92, but reiterated his buy rating on the stock.

Day has undoubtedly been a key architect of the company's growth, taking it from 87 stores at the beginning of her tenure to 218, including new outlets in New Zealand and Australia. Its Web site was launched in 2009, and now accounts for 15.6% of its revenue. In the latest quarter, online sales rose 40% from a year earlier, to $54.0 million.

The company is also facing rising competition as other athletic firms, like Under Armour (UA), Nike (NKE), and The Gap (GPS), expand their yoga offerings.

Despite Day's resignation and the company's need to fill both her job and other senior positions—particularly in the product area—there are lots of reasons to be bullish about the stock's prospects, including:

Strong brand loyalty. LULU's relatively long history, reputation for high-quality clothing, and focus on customer service and community involvement have helped it carve out a unique place for itself that's tough for competitors to crack.

Men's clothing is a growth area. Lululemon has expanded into other sports, such as running, which has helped it attract a wider variety of customers, including more men. At the same time, more men are taking up yoga in North America.

Balance sheet remains healthy. The company has a growing cash pile to support its ongoing expansion. It ended the latest quarter with cash of $588.4 million, up from $424.3 million a year ago. It also has no long-term debt.

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