Breakout

Why Lululemon Is a Buy Right Now: Macke

Jeff Macke
Breakout

Sports apparel maker Lululemon (LULU) reported earnings last night. Here's the quick and dirty on the quarter: EPS came in at 33-cents including the endlessly discussed see-through pants debacle. Revenue was good, margins were fine, and guidance was decent.

All was basically well until they got to the kicker: CEO Christine Day is stepping down as soon as a replacement is found. The news surprised the Street and sent shares down 15% from all-time highs at $82.50. The stock dipped below $70 a share in early trading.

Estimates are dropping and there's blood in the Streets. The shares seem expensive and bears are licking their chops. I'm on the other side of the trade planning to add shares anywhere under $70.

That said the product remains the same, the opportunities are huge and untapped, and LULU is replacing a CEO who presided over several operational snafus over the last 12 months. Ms. Day had taken LULU as far as she could in terms of expanding it as a bricks and mortar concept. Now the company needs an operator to execute international expansion plans and improve distribution.

Related: How Much Blame Should a CEO Shoulder for a Recall?

There may be more roaches in the kitchen for LULU. Maybe the numbers aren't all they seem or Day was fired for causes the company isn't addressing. I'm willing to give them the benefit of the doubt largely because of how well it handled the pants recall recently and the overall brand since LULU went public.

The image of Lulu as a retailer is wrong. Direct to consumer revenue (read: online and some catalog) rose 40% year-over-year and now accounts for 15.6% of total sales compared to 13.5% last year.

Lululemon is still regarded as a women's wear company, particularly on the East Coast. The truth is Lulu makes the best workout gear a man can buy. It's more comfortable, looks better and lasts longer than anything from Nike (NKE), Under Armour (UA), or anything else on the market.

Downgrades be damned, I'm using the sell-off as a buying opportunity. THIS IS NOT A RECOMMENDATION but I intend to initiate a position in LULU after the open anywhere under $70 a share. My stop is under $63 (10%).

Feel free to take the other side.

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