Hot Stocks: Lululemon ($LULU) Just Sank, but Will it Rally?

TL;DR – Now might not be a bad time to snap up some $LULU, but the company may not ever regain dominance within its niche. Here’s why.

For those unfamiliar, Lululemon Athletica is the athletic and active wear brand, based in Canada, inspired by yoga and high price tags. Through various ups and downs, Lululemon has nearly achieved world-conquering status by appealing to folks who want to look sexy and athletic, whatever their actual level of physical activity.

What Just Happened to Lululemon Stock?

Yeah, that was a something of a tumble wasn’t it?

At the time of this writing, $LULU has plummeted a nausea-inducing 22.8%. Like so many companies that rely on retail sales, Lululemon is taking a beating in the brick and mortar department. This, and a number of other factors, have created the perfect storm for this brand.

For one thing, they missed Q4 earnings. For another, their latest line of products has been described as “lacking in color”. Finally, investors seem willing to punish $LULU simply because they’re a retail brand, something that is seen as out of step with the times.

But none of these issues touch on the feeling among certain Lululemon customers that the company is failing to differentiate itself from a growing number of high-end athletic wear companies. 5-10 years ago, Lululemon leggings were truly to best that money could buy, but stylistic stagnation and a remarkable growth in competition may be a check on their future growth, at least domestically.

But that’s not all there is to the story.

Can We Expect a Lululemon Recovery?

Lululemon’s margins are in the upper 40’s. They’ve got no debt whatsoever, and plenty of ready cash. Like many brand in and around their niche, they’ve got real expansion opportunities overseas, and an increased emphasis on e-commerce sales as brick and mortar suffers.

Lululemon will probably never be what they once were: the It Brand for yoga and active wear. In all likelihood, they will recover from this minor setback and re-establish themselves as a trusted provider of quality goods. I do think that competitors will erode their market status, creating products based around the qualities that used to make Lululemon so special.

That said, I fully expect $LULU to rise from its level at right around $50. I think the market overreacted on this one. If you’re OK with gambling for quick returns, or if you believe that Lululemon’s long term prospects are rosy, buy away.

That’s my bit. What do you think?