Should I Buy LULU Stock? 3 Pros, 3 Cons

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Lululemon (LULU) got a boost Feb.7 when RBC Capital Markets analyst Howard Tubin upgraded LULU stock from “sector perform” to “outperform.”

lulu-stock-lululemonAs a result of the upgrade, LULU stock has moved higher over four consecutive days of trading. Tubin believes the worst is behind LULU making it one of the best growth stories today.

This change of heart raises the question: Should you buy LULU stock? Here are three pros and cons.

LULU Stock Pros

New leadership: Two things have happened in recent months that will help heal the wounds that developed during Christine Day’s reign as CEO. First, she’s gone. Although responsible for guiding the company through its steep growth curve, she didn’t provide nearly enough leadership for quality control; this rocked LULU’s brand not to mention LULU stock, which is down 41% from its 52-week high of $82.50. Secondly, founder Chip Wilson took his foot out of his mouth long enough to resign as chairman and the company hired Laurent Potdevin — former Burton Snowboards’ CEO — in December. Potdevin was a good hire who should be able to right the ship.

Lowered expectations: Lululemon lowered its Q4 guidance in mid-December to a range of 78 cents 80 cents per share. One month later, it lowered that range an additional seven cents. Investors must be thinking the number could be lower still when it announces Mar. 27. At this point, I don’t think most people are expecting too much from the wounded retailer. Any beat on this number, especially a big one, would likely be construed as a huge positive, sending LULU stock higher. A miss, if only slightly, likely won’t move the stock at all. If you think like Tubin, there’s little downside buying now.

Capital group: If you believe in signs, none is bigger than Capital Group’s announcement that it is now the third-largest shareholder of LULU stock, owning 11% of the company. Only Chip Wilson and Fidelity own more. In the past four months, Capital Group has more than doubled its stake from the 5.1% interest it held at the end of September. That’s a strong statement when you consider Capital Group manages more than $1 trillion worldwide.

But on the other hand…

LULU Stock Cons

The Lululemon manifesto: The bag says it all. Buy something from LULU and you get to take home a self-help book at the same time. How can you go wrong with wise sayings such as “dance, sing, floss and travel?” Put on your LULU outfit and your world gets a whole lot better. It’s Napoleon Hill regurgitated. And there’s nothing inherently wrong with that. However, when you’re charging top dollar for your clothes, at least have the decency to give a hoot about the quality. The next year will speak volumes about the lessons learned (or not) from the sheer pants fiasco. LULU stock depends on it.

Goodbye growth: With a blink of an eye, growth was gone. CFO John Currie stated in mid-January:

“We were on track to deliver on our sales and earnings guidance through the month of December; however, since the beginning of January, we have seen traffic and sales trends decelerate meaningfully.”

How does that even happen? It’s like me stating today that my marriage is great and then asking for a divorce 14 days later. It’s a sure sign that LULU management doesn’t have a good grasp of its business. No wonder LULU stock dropped 17% on the news.

Competition: Glenn Murphy, Kevin Plank, and Mark Parker are staring opportunity in the face. The CEOs of Gap (GPS), Under Armour (UA) and Nike (NKE) have never had a better chance to pull the rug out from Lululemon stock. Of the three, Gap is best positioned to continue grabbing market share from LULU with its Athleta stores catering to the same market but with slightly lower price points. Under Armour is firing on all cylinders at the moment, and you can never write off Nike — the old faithful of sporting goods stocks. With this much competition, LULU stock valuations still seem high.

LULU Stock Verdict

In my December column I rightly predicted LULU stock could fall 10% or more on its Q3 earnings announcement. Sure, the reason for its fall had nothing to do with earnings but rather its outlook for the fourth quarter. However, my concerns about growth and the competition are real. Laurent Potdevin should be able to reignite growth, but I wonder if it will be enough for LULU stock to reclaim its title as market darling.

So, should you buy LULU stock?

If you’re a value investor I’d say no way. GPS is a much better buy at this point. If you’re a patient investor with a 3-5 year window (don’t expect much for the next 12-18 months) and are willing to keep some dry powder in case it falls into the low 40s or high 30s, I’d say swing away.

But if it doesn’t get the quality issues worked out by fiscal 2015, the window on LULU stock closes permanently.

As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


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