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Lululemon Athletica inc. (LULU): This Company Has a Visibility Problem

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Lululemon Athletica inc. (NASDAQ:LULU) is a very special business, the company has unique brand power and is particularly well positioned to benefit from the yoga boom in the middle term. Now that the stock is down nearly 25% from its highs a few days ago, investors may feel tempted to buy some shares of this high-growth company at discounted prices. Invest at your own peril though; there are some serious visibility problems with this company.

Lululemon Athletica inc. (NASDAQ:LULU)

Lululemon has taken a beating since the company reported earnings on June 10; the stock was trading above $82 back then and is now below $64 per share. The earnings report was not the problem; numbers were actually better than expected, but investors felt surprised and concerned when they learned that the company´s CEO, Christine Day, is leaving Lululemon.

Transparency has been a real problem for Lululemon lately. The company had to recall 17% of all women’s bottoms in stores back in March due to “increased sheerness” as the company put it. This caused some public relations damage, and it cost Chief Product Officer Sheree Waterson her job.

But Lululemon Athletica inc. (NASDAQ:LULU) has already fixed that problem; pants are back on the shelves and it doesn´t sound like something serious enough to merit the departure of a successful CEO like Day. Since she became CEO five years ago, the company has increased sales at a compounded annual growth rate of 38.5%, and earnings per share grew even faster at 51.9% per year.

Christine Day led Lululemon through a booming growth phase, so it´s unlikely that she was forced out by the board because of the see-through pants issue. But she said she was leaving because of “personal reasons,” which is the typical phrase corporate executives use when they don´t really want to give any explanations, so investors could really appreciate more information.

Successful CEOs don´t usually leave this way: in a sudden, unexpected manner and without a successor in place. It was quite easy to anticipate that this was going to be seen as troubling news by the market, and this makes the move even more suspicious. It´s hard to tell what it is, but it looks like there may be something else going on here.

Another area in which Lululemon is lacking visibility is in its ability to sustain growth rates in the face of increased competitive pressure. The company´s success has attracted a lot of competition, and whether Lululemon Athletica inc. (NASDAQ:LULU) is up to the challenge remains to be seen.

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