More Downside Likely Ahead for Lululemon Athletica inc. (LULU)

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Lululemon Athletica inc. (NASDAQ:LULU)Lululemon Athletica inc. (NASDAQ:LULU) is once again facing a legal battle due to the recall of its see-through black Luon yoga pants.

The new filing from major U.S. law firm Morgan & Morgan was announced on July 5, and alleges that Lululemon didn’t fully disclose several shortcomings that led to an inflated share price. The lawsuit is on behalf of people who bought shares of Lululemon Athletica inc. (NASDAQ:LULU) between March 21 and June 10. The suit claims defects made the pants see-through due to the firm’s attempt to increase its net profit by cutting costs.

The company is also facing class action suits from Houssam Alkhoury, and Hallandale Beach Police Officers and Firefighters’ Personnel Retirement Fund. That is related to the company increasing possible executive bonuses before the recall.

These suits cast a very dark shadow over the company’s shares, as it faces the costs associated with the recall and paying many possible settlements. The recall alone cost an estimated $60 million according to a report from CTV News.

Lululemon Athletica inc. (NASDAQ:LULU) faces further issues with the founder, Dennis Wilson, saying he plans to sell up to 3.4 million shares of the company according to an SEC filing. That would reduce his stake from 28% to 25%. While I don’t take insiders selling stake in the company too seriously (we all have reasons for needing funds), the timing of the sale could indicate Wilson sees the lawsuits, recall and loss of the firm’s CEO as having a negative effect on the company.

Where to put your money?

NIKE, Inc. (NYSE:NKE) is one of the fastest growing companies in the developing world. Unlike Lululemon Athletica inc. (NASDAQ:LULU), its brand isn’t confined to the fashion trends of the Western market. Shoes and other apparel sell well in China as well, though the firm is struggling to increase sales in that country. The firm also expects revenue to come from the Middle East. However, right now the products are too expensive to generate major profits in these areas, but along with the growing middle class will be a greater ability for the average citizen to afford the company’s products.

The firm has a P/E ratio of just 25, but its growth rate is rapid. In just the last three years, the firm has managed to send a jolt to its revenue by increasing it from $19.17 billion to $24.12 billion. Furthermore, the company projects earnings of $3.42 in 2014 and $3.84 in 2015.

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