Lulu’s Production Chief Gets Pantsed

Be very careful with stocks that are priced for perfection as the future seldom sticks to the script.

| More on:
The Motley Fool

In a move that seemed inevitable given the stern tone the company has taken with its see-through Luon pants recall, Lululemon (TSX:LLL,NASDAQ:LULU) announced yesterday that its Chief Production Officer is “leaving” the retailer.  Specific reasons were not disclosed.

Mean ol’ Mr. Market

Since announcing the recall on March 21, Lulu’s stock has fallen from above $70 to the current $65 or so.  Nearly a $1 billion has been shorn from the company’s market capitalization for an issue that is expected to cost the company an estimated $0.11 to $0.12 in first quarter earnings.  This amounts to net income of about $16.8 million.  $1 billion in market cap for a $17 million hit to the bottom line – seems a tad excessive, no?

The hit that the stock has taken is a text-book case of what happens when a setback occurs at a company that the market has priced for perfection.

Lulu’s stock has more than tripled over the past five years and the Capital IQ earnings estimate predicts tremendous growth over the next five.  Analysts expect EPS to grow from $1.80 in 2013 to $3.77 in 2018.  For this tremendous past performance and impressive predicted growth, Lulu’s shares traded with a trailing P/E multiple of about 43.5 prior to the recall announcement.  Now, this multiple sits a smidge below 40.  Still a mighty high premium to the mid-teen multiple the rest of the market currently carries, but “cheap” relative to Lulu’s past.

Foolish Takeaway

The rewards are significant for investors that buy into stocks priced for perfection if the future plays out according to script.  These princely valuations however can be short-lived if the story begins to change.  Just ask most tech companies from the late ‘90s.

If Lulu’s production issues are a temporary hiccup, this dip will prove to be a buying opportunity as the multiple can be expected to expand back to pre-recall levels.

Given the premium to the rest of the market however, Lulu’s current valuation still does not support the production glitch being any more than a one-quarter story.  Expect the multiple to contract further and the shares to continue their decline if management can’t right the ship before the next quarter’s release.

Canadian investors deserve to own great businesses and the U.S. market is home to some of the best in the world.  We have created a special FREE report that identifies 3 U.S. businesses that are worthy of your hard-earned investment dollars.  Simply click here to receive “3 U.S. Stocks Every Canadian Should Own” – FREE!

Follow us on Twitter and Facebook for the latest in Foolish investing.

Fool contributor Iain Butler does not own shares in any of the company’s mentioned.  The Motley Fool has no positions in the stocks mentioned above.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

Stock analysts were once excited about construction company Aecon as an investment.

Bull or Bear: Why Analysts Changed Their Tune on Aecon Stock

Analysts had been champing at the bit for the construction company, but the tides have turned.

Read more »

Specialty Brands faces higher raw materials costs.
Dividend Stocks

What’s Next for Premium Brands Stock?

Shares of the specialty food production and distribution company have fallen about 25% since last October.

Read more »

Double exposure of a businessman and stairs - Business Success Concept
Dividend Stocks

2 Interesting Buys in Any Market

Here are two intriguing buys in any market climate that offer defensive appeal as well as growth and income earning…

Read more »

Bank sign on traditional europe building facade
Bank Stocks

Should You Buy Bank Stocks Now?

Canadian bank stocks are getting cheap. Is this the right time to buy?

Read more »

stock data
Stocks for Beginners

2 Reliable Stocks Beginners Can Buy Amid the Market Selloff

As the broader market turmoil continues, new investors can buy these two reliable dividend stocks to get good returns on…

Read more »

Biotech stocks can be good yet risky investments.

Is Bellus Health Stock Still a Buy After 30% Earnings Jump?

The biotech continues to make progress on obtaining FDA approval for its chronic-cough therapy.

Read more »

Dividend Stocks

TFSA Investors: 3 TSX Stocks for Tax-Free Passive Income

These Canadian corporations have strong visibility over future earnings and dividend payouts.

Read more »

Piggy bank next to a financial report

Do You Have Cash Sitting in Your TFSA? Now Is a Great Time to Buy Stocks

If you have cash in your TFSA that you're looking to invest, now is a great time to buy high-quality…

Read more »