Lululemon (LULU) announced that it has restocked its flagship product, luon yoga pants (here), after the company pulled the product in March due to excess sheerness. When the problem occurred in mid-March, the stock had taken a big hit, falling from around $70 to $62 (here). In retrospect, one can see that it was a great buying opportunity since the stock has recovered all its losses and then some.
I must admit that my knowledge of the company is limited but (thanks to my wife) I do know that Luluemon manufactures and sells high-end yoga apparel. As such, Luluemon commands a sizable profit margin of 27% compared to Nike (NKE) at 12% and Gap (GPS) at 7%. My wife swears by their products which led me to ask her several questions about the company and the stock.
I posted a general question on the perception of the brand to which she replied:
I like them, but wouldn't buy anything from them yet. This incident will lead them to tighten their quality. I thought about buying Athleta (a division of Gap), but I still preferred Lululemon brand. The stock prices are dropping. I think I would buy their stock.
Since that conversation on March 20th, the stock has risen more than +25%. The thought of speculating crossed my mind but no action was taken. Foregoing the potential profits (or loss) doesn't bother our team since we believed that opportunities often resurfaced.
But what then can we learn from this event?
The key take away is that one-time problems can make or break a company but it may create buying opportunities. As expected, Lululemon has tightened quality control as they have announced all their bottoms will undergo 15 tests!
If an investor has limited understanding of the stock market or investing the approach of Peter Lynch to "buy what you know" is a legitimate way of investing or speculating, with a healthy understanding of risk. One last important lesson I learned, always listen to your wife.
