What's Going on With Lululemon?

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News of a departing Chief Executive Officer is rarely received well by the market, and in the case of a company already on the heels of a product recall, it gets even worse. You can imagine a company under these circumstances would probably see their stock price suffer, and that’s exactly what happened with Lululemon Athletica (NASDAQ: LULU) on June 11.

Lululemon shareholders have been taken down a rocky road these past few months since the recall of their black yoga pants, and the fact that CEO Christine Day announced her departure means investors should take some time to review whether their company is still in good shape.

Solid performance despite the headwinds

Lululemon shares collapsed 17% on the day its CEO announced she would be leaving the company. While a massive drop like that might make it seem like the company is a sinking ship, it’s worth noting Lululemon’s strong underlying performance in recent quarters.

Before the recall Lululemon was firing on all cylinders. 2012 proved to be an extremely successful year for the company. Lululemon's reported net revenue and diluted earnings per share soared 37% and 46%, respectively, year over year. Moreover, 2012 same-store sales, which measures only sales at locations open at least one year, rose 16% on a constant currency basis.

The company’s solid performance extended into the first quarter, with sales increasing 21% year over year, although diluted earnings were flat from the prior year.

Lululemon successfully beat back fears surrounding the black yoga pants recall, and it’s likely the company will be able to emerge from its CEO departure as well. That being said, a 17% drop in one day is hard to swallow. On surprising news such as a company’s Chief Executive leaving, the market tends to sell first and ask questions later.

Alternate industry players to consider

For investors who don’t want to endure this much volatility, there are other stocks in the athletic apparel space that are interesting ideas. First and foremost is industry juggernaut Nike (NYSE: NKE), which almost needs no explanation.

Nike is one of the most universally known and most valuable brands in the world. There’s good reason for that: the company seems to provide excellent growth numbers every quarter. Nike’s sales grew 9% in both its third quarter and through the first nine months of the year as opposed to the same periods in 2012.

Another industry competitor is Under Armour (NYSE: UA), which has been racking up great performance of its own. Under Armour executed admirably in fiscal year 2012, as net revenues increased 25% to $1.83 billion compared with $1.47 billion in the prior year. The company beat its own revenue target for the full year of $1.82 billion. Diluted earnings per share for the full year increased 31% to $1.21 per share.

Word to the wise: tread carefully

Growth stocks such as Lululemon and Under Armour often command lofty valuations. Unfortunately for investors, stocks with exorbitantly high P/E ratios can see big swings in share price when the unexpected occurs.

That’s exactly what happened to Lululemon, and there’s nothing preventing more volatility in the future. Even after the 17% drop, Lululemon trades for 36 times trailing earnings according to Yahoo Finance. Under Armour, meanwhile, is equally priced for perfection, exchanging hands for more than 50 times trailing EPS.

For investors who are willing to take the risk, Lululemon and Under Armour are both growing sales and profits at very high rates. Value investors who are more interested in meaningful margins of safety likely will find more to like from Nike, which is also growing yet trades for a more reasonable 24 times earnings. In addition, Nike pays a 1.3% dividend, providing another layer of downside protection. As a result, I’d recommend investors prefer Nike among this group.

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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Robert Ciura has no position in any stocks mentioned. 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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