Lululemon: Bad Publicity Creates Value

03/13/2014 7:00 am EST

Focus: STOCKS

This featured stock has $588 million in cash and zero debt, earnings per share have more than doubled in the last three years, and it boasts a healthy profit margin of 19%; and it is one of the most recognizable brands in a fast-rising sector, explains Chris Preston, in Daily Profit.

Lululemon (LULU) has become a classic case of a good company getting beaten down by bad publicity.

The company has had a rough year; things went from bad to worse for the women's athletic apparel retailer after a series of embarrassing—and at times offensive—incidents.

In March 2013, Lululemon had to recall a line of its black Luon yoga pants because of their see-through fabric. The screw-up cost the company an estimated $67 million.

The stock then dipped even further in June when CEO Christine Day stepped down. The stock tumbled 17% in one day and 25% over the ensuing two weeks.

Regarding the pants recall debacle, in November 2013, founder Chip Wilson infamously said "Quite frankly, some women's bodies just don't work for it. ” He made those remarks on Bloomberg TV, no less. A month later, he was forced to resign.

Those blunders were momentum-killers for an otherwise growing company. Lululemon shares have fallen 22% in the last year—at a time when the S&P 500 (SPX) has risen more than 23%.

The company's EPS growth has slowed a bit of late, with two of the last three quarters coming in even with the previous year's tally.

But sales haven't really slowed. The bad publicity didn't seem to put much of a dent in Lululemon's customer base. If anything, it's still steadily expanding.

Barring any further embarrassments—and having Chip Wilson out of the picture should help in that regard—the company appears poised to finally make an uninterrupted run.

For starters, new CEO Laurent Potdevin—formerly president of Toms Shoes—is in his first full quarter as head of the company. More importantly, earnings per share are expected to increase by more than 16% in the coming year.

Revenues are expected to jump another 16%. And Lululemon still has no debt. Meanwhile, the stock isn't overly expensive at roughly 23-times forward earnings. Now it's time for value investors to buy.

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