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

money cash dividends
Dividend Stocks

2 TSX Dividend Stocks Paying Big Income in a Bearish Market

Despite a pullback in the market, there are still plenty of dividend stocks paying big income to buy. Here’s a…

Read more »

Paper airplanes flying on blue sky with form of growing graph

Here’s Why Smart Investors Are Buying Bombardier Stock Hand Over Fist

Bombardier stock jumped 16% in a week amid a bearish market. What caused investors to buy this stock hand over…

Read more »

data analyze research

My 3 Top TSX Portfolio Holdings Going Into April 2023

Are you looking for TSX stocks to add to your portfolio in April 2023? Here are my three top holdings!

Read more »

consider the options
Dividend Stocks

Better Buy for Dividends – Enbridge or BCE Stock?

Given the favourable market conditions, higher dividend yield, and cheaper valuation, I am more bullish on Enbridge.

Read more »

Dividend Stocks

3 of the Best Canadian REITs to Buy While They’re Still Undervalued

These three Canadian REITs have attractive growth potential and are trading undervalued, making them some of the best to buy…

Read more »

Investor wonders if it's safe to buy stocks now
Bank Stocks

Better Bank Buy: Bank of Montreal or Bank of Nova Scotia?

Bank of Montreal and Bank of Nova Scotia trade near 12-month lows. Are these bank stocks oversold?

Read more »

Target. Stand out from the crowd

3 TSX Stocks to Buy in the Current Market Dip

The market dip from the U.S. banking crisis has created an opportunity to buy three fundamentally strong stocks before they…

Read more »

stock market
Metals and Mining Stocks

2 TSX Mining Stocks to Buy as Gold Prices Surge Past $2,000

Bullish on gold? Investing in quality mining and royalty stocks such as Barrick Gold is a solid bet in 2023.

Read more »