Lululemon: Don't be a Day trader, be an investor

Despite the departure of the CEO Christine Day, the company should still see strong growth ahead.

By TheStreet Staff Jun 17, 2013 12:47PM

thestreet logocopyright Thomas Northcut, Lifesize, Getty ImagesBy Bret Kenwell

 

Last Monday after the close, shares of Lululemon (LULU) fell off a cliff as management took investors by complete surprise during its first-quarter earnings report.

 

While investors were anxiously waiting to see how the company fared from the effects of the see-through pants issue, CEO Christine Day dropped a bomb on them by announcing her resignation.

 

Yes, Day has decided to step down, but will remain at the helm until a replacement is found. Shareholders were not happy, flushing the stock down approximately 20% over the next two trading sessions.

 

With the exception of one company executive (Wall Street Journal), everyone was taken by complete surprise. But this is not the end of the world. Day was not fired. She was not caught up in a horrendous scandal that all but forced her resignation. No, she resigned on her own, for personal reasons.

 

Management likely expected shareholders to be upset, but probably thought that the nice earnings beat would soften the blow. As if a top and bottom line beat wasn't enough, the company also provided excellent second quarter guidance.

 

While analysts were expecting earnings of 33 cents per share on $328 million in revenue, Lululemon guided way above expectations, looking for earnings of 33 cents per share to 35 cents per share on revenue of $340 million to $345 million.

 

Earnings per share estimates are fairly close to what analysts expected, but revenue was much higher than most had anticipated. Assume for a moment that Lululemon hits the middle of the provided range ($342.5 million) and that analysts don't adjust their revenue figures. Then we're talking about a $14.5 million dollar beat on top line results.

 

It would appear that the company (which typically beats its own estimates quite handily) thinks they are fine -- with or without Christine Day. In fact, Day believes this too, stating on the conference call:

 

"Plans have been laid for the next five years and a vision set for the next 10. Now is the right time to bring in a CEO who will drive the next phase of Lululemon's development and growth. I will continue to actively lead the organization while the board searches for a new CEO, and will work to ensure a smooth transition."

 

Did you hear that? Essentially what Day is saying is that nothing has materially changed with the company and its plans for the next five years are unaffected. With the exception of a few hiccups and bumps in the road that are bound to happen, everything should be fine.

 

This is not an operational issue, it is a personnel issue. She is willing to step away and know that the company will remain strong. Lululemon now needs a leader to step into Day's role and execute the plan in front of them.

 

The growth, international expansion and sales are all still intact. The company even raised its full year estimates, albeit slightly. I get that Day was important to shareholders and that this announcement had some form of shock factor to it but investors should ask themselves one important question: Is Christine Day worth 20% of the share price? If the answer is "no," they should be buying.

 

Day didn't even need to say what she did for us to know that the company is fine. The pants problem is in the past, the company beat earnings, raised estimates and this apparel giant is going to continue into its next phase of growth.

 

Although Lululemon's level of revenue growth is much closer -- and is actually higher -- than that of Under Armour (UA), its valuation isn't. At least, in the short-term that is. Lululemon now has a price-to-earnings ratio of 36, whereas Under Armour's is more than 50. This is a classic overreaction and soon investors will see that Lululemon is a steal, especially when compared to its rivals.

 

At least the Canadian-based company can have a laugh or two about it. This morning when I went to its website, a giant red banner on the homepage read, "CEO Wanted. Click Here To Apply."

 

Lululemon can joke because it knows they're going to be fine and investors should too. Just because Day is calling it a day, doesn't mean we have to. We'll thank her for the discount later.

 

At the time of publication the author is long LULU.

 

 

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