Hot Stock: Lululemon

Is this a buy opportunity?

It’s been a wild couple of days for Lululemon (TSX: LLL) investors. Many were likely elated when, on June 10, it revealed its analyst-beating quarterly results and then were disappointed when it followed that up with an announcement that its CEO, Christine Day, was abruptly stepping down. The positive earnings news couldn’t stop the stock from falling, though. Confused investors sold off enough stock for the share price to plummet 21% in two days.

Many people are probably wondering if they should follow their fellow investors and sell off what they own or if they should hang on or even buy more. Camilo Lyon, an analyst with Canaccord Genuity, falls into the camp. On July 11, he reiterated his buy rating on the stock.

While he was surprised by the announcement, he thinks it was brought about by recent quality control issues, such as March’s see-through pants debacle. There have been other quality issues as well. Still, Day “was instrument in bringing the Lululemon band to where it is today,” he wrote in his report, and that’s why investors have punished the stock.

Despite the departure, he still thinks the company is as sound today as it was last week. “We have no reason to believe the fundamental growth trajectory of the business or consumers’ desire for the brand has changed,” he says, adding its issues with the pants have been fixed and they’re now back in stores.

Other analysts aren’t sure what to make of the company’s prospects. Howard Tubin, an analyst with RBC Capital Markets, wrote in a report that this is a major transition and that while he thinks the long-term growth prospects are still good, it’s not business as usual at anymore.

Lyon still predicts that the company can increase revenues by 25% year-over-year in 2014 and he expects earnings per share to hit $2.08 this year, up from $1.86 in 2012. The news has forced him to cut his price target from $92 to $87, but that’s still some significant upside from the $64 it’s at today. Other analysts say the stock price will climb to a similar number, though ISI Group says it’ll reach $100 over the next 12 months.

The question as to whether to buy or sell really depends on whether you think something drastic has changed. Thanks to in large part to Day, people love Lululemon and it’s unlikely a CEO switch will change that.

If it’s smooth sailing from here then the company should do fine. If, however, more quality control issues come to light, then there’s a good chance investors—and consumers—will stay away. “We suspect less tolerance will be allowed for future stumbles,” says Lyon, “(so we) recognize that the risk profile is greater today.”