Are These Apparel Companies a Buy?

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Lululemon Athletica (NASDAQ: LULU) has continued to make headlines, most recently with the announcement that CEO Christine Day would be leaving the company. This news came shortly after the PR nightmare involving the Luon line of yoga pants that had to be pulled from shelves because they were too sheer. 

It does not appear that Day was fired, and she will remain at the reigns until a suitable replacement can be found. While there were some investors calling for Day's ousting after the Luon debacle, the market clearly did not take kindly to the announcement as the stock dropped more than 17% on the news. 

The drop was further magnified by the fact that the announcement came during the first-quarter earnings release. Despite the Luon issue, the company grew revenue by 21% and same-store sales increased by 7%. However, profits and margins were squeezed by the $17.5 million provision for the pullback of black Luon pants.  Earnings per share for the quarter came in flat at $0.32 despite a small increase in net income for the quarter. The greatest hit to earnings was evident in gross margin, as it fell to 49.4% of net revenue from 55.0% in the previous year.   

Looking forward

The company said that the problems surrounding the Luon pants are behind it, but that there would be a financial impact in the second quarter of 2013. The company expects gross margin compression due to restocking issues. However, beyond the second quarter, the issue should not impact financials. 

If we look beyond the recent issues, Lululemon's future may still be bright. While Day will be leaving as CEO, the search committee can take time to identify and vet the best possible replacement. This will allow the company to hire the strongest possible candidate to continue to grow the business. 

The company also has plenty of room for international expansion and is building a framework for expansion into Asia and Europe with plans to open its first stores in these regions during 2014. The company also plans to open an additional 35 to 40 stores in North America during 2013 as it moves toward its goal of 300 stores in the region. Additionally, the company has plans to open standalone stores for men's products in 2016.  

Other players

Under Armour (NYSE: UA), the Baltimore-based apparel manufacturer, has made it clear that it wants to make a push into Lululemon's territory. The company launched its first women-targeted campaign in 2012 to market several lines of women's athletic apparel. Under Armour had $400 million of sales from women's products in 2012 and added Leannne Fremar as executive creative director for Women's. 

Fremar brings extensive industry experience and previously spent 10 years with high-end fashion company Theory as the brand's creative director. The clients she catered to at Theory are the same high-end clients purchasing Lululemon clothing. Under Armour should also be able to offer more competitive prices than Lululemon given its resources and production capabilities. Under Armour has enjoyed strong growth and seems poised to make a serious push into the women's athletic apparel market. 

The granddaddy of the industry, Nike (NYSE: NKE), is also a continuing force in women's apparel. In 2012, women's training revenue grew 21%, becoming a billion-dollar revenue generator for the company. Nike clearly has the brand recognition and financial resources to compete with Lululemon for market share.  Most importantly, Nike has the resources to offer a more competitively priced product versus current Lululemon products.      

Closing it out

Lululemon has taken a hit as a result of poor product management and CEO turnover. However, the company has strong growth prospects and should be able to find a capable leader. International opportunities could lead to strong revenue growth, but I question the success a men's shop could have for the company.  After the next quarter, margins should return to historic levels and boost EPS results.

The company will continue to face tough competition as larger companies push into the space with lower-priced offerings. However, Lululemon seems to have maintained brand strength despite the Luon issue and can continue to grow same-store sales. If the stock was to fall a little further, it could make an interesting investment for the long-term investor. 

Lululemon has the potential to grow its sales by 10 times if it can penetrate its other markets like it has in Canada, but the competitive landscape is starting to increase. Can Lululemon fight off larger retailers and ultimately deliver huge profits for savvy investors? The Motley Fool answers these questions and more in its most in-depth Lululemon research available. Thousands have already claimed their own premium ticker coverage; gain instant access to your own by clicking here now.

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John Timmes owns Nike stock. The Motley Fool recommends Lululemon Athletica, Nike, and Under Armour. The Motley Fool owns shares of Nike and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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