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Why Investors Should Avoid Lululemon Athletica inc. (LULU): The Gap Inc. (GPS), Under Armour Inc (UA)

Yoga apparel retailer Lululemon Athletica inc. (NASDAQ:LULU) thoroughly underwhelmed the market this week when it announced its fourth-quarter results. The company’s comparable-store sales growth fell, and it announced that it was projecting a fall in earnings per share in the coming quarter. That drop will largely be due to the recent recall that the company issued after it discovered that a series of its products were too sheer for customers’ tastes.

Lululemon Athletica inc. (LULU)

The stock was down on the earnings news and, added to the drops from earlier in the month, helped pull the stock down 19% since the beginning of 2013. That means the company is also down over the past 12 months, with investors growing weary of product setbacks, slow international expansion, and shrinking comparable sales growth. Lululemon is looking like an increasingly dangerous recommendation, and investors would be better served moving on to greener pastures.

The year in review
This time last year, Wall Street couldn’t get enough of Lululemon Athletica inc. (NASDAQ:LULU). The company was coming off a 100% share-price increase over the previous 12 months, with all sorts of plans for the coming year. It was going to open 37 new stores, including locations in New Zealand and Australia, and keep gross margin above 55% — it did that. It was planning to hit earnings per share of $1.50 to $1.57 — it hit $1.85. It even planned to fix its inventory problems — that only kind of worked out.

There’s the rub. Lululemon didn’t manage to stop itself from hurting itself. The company said in its call last year that it wanted to “enter 2012 with a strong inventory position to break the cycle of chase.” It did that, in that it managed to keep enough stuff in stock over the course of the year to sell it all. But early this month, we found out that there were new problems on the horizon. The reason Lululemon is having a hard time of things isn’t that it had a really bad 2012, but that it’s already having a bad 2013.

Recall, if you will, the promises made
Lululemon Athletica inc. (NASDAQ:LULU)’s earlier problem now pales in comparison with the new one. Back then, the company was running out of clothing to sell because it had planned poorly. That’s not great, but it indicates how popular the company had become, and the fact that you couldn’t get the items drove interest in them. The new problem is a PR nightmare — clothing that you bend and twist in that loses its opacity when it’s stretched. All the good work that Lululemon did over 2012 to make sure it had the right amount of product in-store got thrown out the window when huge chunks of that product became worthless.

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