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Imagine there’s a company with $588 million in cash and zero debt.
The company’s earnings per share have more than doubled in the last three years, and nearly quintupled in the last four years. Its earnings have beaten analyst expectations for four straight quarters. It boasts a healthy profit margin of 19%. And the company is one of the most recognizable brands in a fast-rising sector.
Well, you don’t have to imagine. Such a company already exists. It’s called Lululemon (Nasdaq: LULU).
Lululemon stock 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.
Here’s a timeline (and accompanying chart) of Lululemon’s recent missteps:
–March 2013: Lululemon had to recall a line of its black Luon yoga pants because of their see-through fabric. Shares tumbled 11.5% in the week that followed the recall announcement. The screw-up cost the company an estimated $67 million.
–June 2013: Lululemon stock 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.
–November 2013: Founder Chip Wilson infamously said the following when asked about what happened with the pants recall debacle: “Quite frankly, some women’s bodies just don’t work for it. … It’s more about the rubbing through the thighs, how much pressure there is over a period of time, how much they use it.” He made those remarks on Bloomberg TV, no less. A month later, he was forced to resign.
As the chart reveals, those blunders were momentum-killers for an otherwise growing company. Lululemon stock has fallen 22% in the last year … at a time when the S&P 500 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.
The bad news clearly resonated on Wall Street, however. LULU shares fell a combined 42% in the weeks that followed the three aforementioned “bad news” events. That’s nearly double the total decline in the share price last year. And the bad news events were spaced out enough that every time Lululemon built up momentum, investors hammered it back down.
Now it’s time for value investors to buy.
Lululemon has become a classic case of a good company getting beaten down by bad publicity. 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.
All of those factors are reasons why the average price target for Lululemon stock among 28 brokers is $59.57, 14% above its current price. At least one analyst thinks the stock could go to $84.
We at Wyatt Investment Research frequently advise investors to “buy bad news.” Lululemon could be the latest shining example as to why.
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