Here’s a riddle: What company can recall a big chunk of its inventory, warn of a “significant impact” on its financial results, and still get a 13% rise in its share price in the following seven weeks? Why, lululemon athletica (LULU), of course.
Conspiracy theorists, who suspected see-through yoga pants were a ploy to create still more buzz around the lululemon brand, will feel validated, no doubt.
But perhaps it's merely a case of investors being loyal to a stock that has so handsomely rewarded them, as seen in a stock chart. Lululemon announced on March 18 that it was recalling about 17% of its women’s bottoms inventory because they were too sheer. It did not take an analyst to look around the stores and realize that selling women’s yoga pants and shorts is the foundation of lululemon’s success. The company cut its forecasts for same store sales gains in the first quarter by half.
But lululemon’s full-year earnings released on March 21, and new 2013 earnings guidance gave Wall Street a pleasant surprise. The shares have had few off days since. That is, until this week. A pension fund shareholder launched a lawsuit accusing the board of wasting assets by increasing potential executive bonuses just before announcing that recall. It’s yet unclear whether this accusation will have a long-lasting effect on the share price.
Investors who have followed lululemon in recent years might not be surprised by the resilience of its share price. As a company that’s given shareholders a nearly 900% share price return in four years, Wall Street is in love with lululemon. Investors lately have been paying share prices that equate to a PE ratio of about 40, based on historic earnings, and 38 times forward earnings. They consider that price fair for a company producing the kind of profit and revenue growth seen below.
Analysts recommendations on the shares are mixed, given the valuation, but largely unchanged since the recall. Looks like it will take more than embarrassing pants to put investors off lululemon.
Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at firstname.lastname@example.org.
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