Lululemon Athletica Inc. (NASDAQ: LULU) stock jumped more than 3% on Wednesday after analysts at Sterne Agee upgraded LULU shares. The upgrade comes after Lululemon stock has been plagued with issues over the past two years … but LULU finally is showing signs that it’s getting its act together. 
In 2013, Lululemon stock had a really bad year — LULU struggled mightily on the public relations front, ultimately translating into lower sales.
Lululemon was forced to recall yoga pants that turned out to be too sheer. And then Chip Wilson, the company’s founder, made things worse by telling the world that “some women’s bodies just actually don’t work” for the company’s pants.
The quality control issues didn’t end there, either — later in 2013, customers began complaining about pants being too sheer once again.
These issues led to both Chip Wilson being removed as Chairman and then CEO Christine Day also being replaced by Laurent Potdevin, former president of Toms Shoes and executive at LVMH Moet Hennessy Louis Vuitton SE(ADR) (OTCMKTS:LVMUY).
Potdevin has now been at the helm of LULU for more than a year, and the company has been scandal-free during that time.
LULU has also seen a change in the CFO seat with Stuart Haselden, a former J. Crew executive, taking the job. Sam Poser, an analyst from Sterne Agee, noted in his upgrade of LULU that even though Stuart has only been with LULU for about nine weeks, he is very impressed with Stuart’s understanding of the business and what makes the company tick.
The analyst feels that Haselden will really add value to Lululemon stock because of his previous experience at a more vertically integrated retailer.
Sterne Agee upgraded its rating on the stock from “hold” to “buy” and increased its 2015 earnings estimates from $1.89 per share to $1.98. EPS estimates for 2016 also improved from $2.19 to $2.37. Sterne Agee upped its price target on Lululemon stock to $77 — a 12% increase from the stock’s current price.
A 12% gain would be nice in any market, but it’s especially attractive at a time like now, when the major indices are all relatively flat.
Should You Buy Into the Yoga Craze?
Of course, one analyst upgrade doesn’t necessarily make LULU stock a buy. But Sam Poser makes some good points, especially when it comes to new management. Stuart Haselden brings great experience and knowledge which should allow LULU to become a better vertically integrated retailer, which should translate to better profitability.
Also, Laurent Potdevin’s experience at LVMH should help LULU continue to improve quality and maintain its high-end brand image. With all the competition in the workout clothing industry from big players in the market like Nike Inc (NYSE:NKE), Under Armour Inc (NYSE:UA) and others, LULU’s brand image is one of the biggest factors setting it apart from the other.
As a shareholder, I am slowly gaining more and more confidence in the ability of Lululemon stock to be a great holding, but I will wait to see hard results before adding to my current position and I would recommend other investors to do the same.
At the time of this writing Matt Thalman was long LULU and UA. Follow him on Twitter @mthalman5513.
