Comeback Stock Stories: The Fall and Rise of Lululemon

For this episode of Motley Fool Answers, Robert Brokamp and Alison Southwick enlist Motley Fool analyst Seth Jayson for a discussion of comeback stocks, focusing on a few well-known companies that have been beaten down, then turned things around for patient shareholders. They also consider the kinds of circumstances under which Foolish investors will want to jump into stocks that are in the midst of being punished by Wall Street.

In this segment, the company under the microscope is Lululemon Athletica (NASDAQ: LULU), which stumbled from its high-flying consumer-darling status following its see-through yoga pants problems, and its less-than-inspired response to them. Share prices fell by more than half, but even at the nadir, there was some reason for optimism.

A full transcript follows the video.

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This video was recorded on Sept. 18, 2018.

Alison Southwick: Let's start off by talking about Lulu, one that's very close to my heart.

Yes, I bought it when everyone said this is the best company ever. It's amazing. And then a few things happened.

Seth Jayson: Yeah. It was super expensive looking. I thought it was pretty silly, the price, but even at the time the amount of money they were making per square foot of store was just incredible. And then they had some yoga pants go see through, or the reports that thigh rub was abrading them and they'd become see-through very quickly.

Southwick: And the CEO said some crazy things, too.

Jayson: I think what he actually said was more along the lines of, "Some women's body types don't work with our clothing," which was, I think, not unfairly interpreted as, "You're too fat to wear our clothes."

Southwick: Yes!

Jayson: Which is a problem when most of your business is to women...

Southwick: And getting fit!

Jayson: And they're getting fit. And so he had to leave as a result of this, and they had to do a lot of clean-up. I'm trying to look at my notes, here. In early 2014 or late 2013, the stock was somewhere around $75 and it went down. In late 2014 it was near $35. So it got cut about in half as a result of YogaPantsGate, as well as the CFO was leaving at that time. And this is about the time I took it on at Hidden Gems, even though I had been a skeptic on the company. I like to, every once in a while, buy a stock that I think is ridiculous just to remember that I don't know everything.

Southwick: You bought it as a lesson?

Jayson: Lululemon was one I started looking at wondering, "Well, no, now what does it look like because this thing has done a lot better than I thought for so many years." It looked to me like a brand that was still very strong and that had issues that could be overcome. And indeed that was the case, but it took a couple of years for the comeback to really take hold. The stock sort of spent a couple of years flirting and getting back up to $75. But they were making progress with, first of all, apologizing. Getting the product better. And then coming out with new product.

And then they really hit their stride in 2017 and started getting the sales growth going again and they also, at that point very importantly, started to do a much better job with online sales and were very targeted so that other companies that are doing business online wouldn't be pulling away from them quite so much. And they have been on a tear since early 2017. The stock is now at about $150. And interestingly, this latest quarter, which was a record quarter stock, is at an all-time high, right now, or close to it.

It was done without a CEO really running things, because the replacement CEO they had was ushered out not so long ago and we're not exactly sure why, but it seems to be one of those human resources kinds of issues.

Southwick: So a company that could be run by no one could still be successful.

Jayson: Yeah. And they just brought in a new CEO and I'm kind of going, "Why mess with success? It seems like all of the top people reporting to the CEO could just do fine as a committee, which is presumably what they've doing." So that's a pretty interesting lesson about a company with a strong brand that came back. They don't all go that way, of course.

Alison Southwick owns shares of Lululemon Athletica. Seth Jayson owns shares of Lululemon Athletica. The Motley Fool recommends Lululemon Athletica. The Motley Fool has a disclosure policy.