Buy or Sell: Lululemon (LULU) - Real Time Insight

Lululemon ( LULU ) has been a hot stock for many investors over the past few years. The company has seen tremendous earnings growth and it has become a popular pick for investors seeking a top retail name that has potential for further gains.

In fact, in 2012, LULU added about 40%, easily outpacing the retail sector and the broad S&P 500 as well. However, 2013 hasn't been as kind to LULU as the firm has faced a big slump to start the year, and then further issues lately thanks to quality control issues.

The company actually revealed, just a few days ahead of the earnings report, that it was recalling many pants from one of its key lines due to the see-through nature of the fabric's sheer. This information on a line that accounts for nearly 20% of the business helped to push the stock down by nearly 7% in the past five days.

Now, with earnings coming up on Thursday investors are left with a very difficult decision; buy or sell this once high-flying stock?

Reasons to Buy:

  • LULU has seen impressive growth rates in the past, and its PEG is still reasonable.
  • This 'sheer' issue with the fabric will be corrected, and now represents a great buying opportunity on a company that has plenty of room to run.
  • The firm has beaten estimates in four of the previous quarters so they clearly have the ability to match even lofty expectations.

Reasons to Sell:

  • LULU now only has a Zacks Rank of 3 or 'Hold'. This is poor compared to where the company had been even a few weeks ago when the stock was Ranked as a Buy. The industry rank also isn't very favorable, so this may be a wider problem going forward.
  • Analyst estimate revisions are not favorable heading into the next quarter or the next year, with near universal agreement lower.
  • Having pants that aren't see through seems like kind of a pretty basic-and necessary-- part of the process, especially if you are spending $100 on them. Is it possible that LULU has sacrificed quality for growth and that some of the die-hards will abandon the company ?

What do you think?

Is this a great time to buy a superb retailer on a dip, or is it the end of LULU's incredible story?

Let us know in the comments below!

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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