Lululemon: Here's What We Know

Friday capped a difficult week for stocks with another losing day, as the S&P 500 (SNPINDEX: ^GSPC  ) , and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) , lost 0.6% and 0.7%, respectively.

Lululemon laughs it off
The announcement on Monday that Lululemon Athletica's (NASDAQ: LULU  ) CEO Christine Day would be stepping down took the market by surprise -- and not the good kind, as the stock shed nearly a fifth of its value the next day. The stock has yet to recover, and the company is trying to lighten the mood with a facetious CEO job ad/ application on its website (reminiscent of Ben & Jerry's "Yo! I'm Your CEO" essay contest that ran in 1994-1995 simultaneously with their search for a new CEO).

The reasons for Day's departure remain a mystery, but it's unlikely that she was forced out by her board. This looks like a case in which the "personal reasons" that outgoing CEOs mechanically cite in the press release is actually accurate.

The following graph shows the performance of Lululemon's stock (blue line) on a total-return basis, starting on Jul. 1, 2008, the date on which Christine Day assumed the role of CEO. The graph also includes three benchmarks: the S&P 500, the Russell 2000 Growth Index (which tracks small-capitalization growth stocks) and Under Armour, the athletic apparel maker that is arguably Lululemon's closest peer.

LULU Total Return Price data by YCharts

The graph makes it plain that, over this nearly five-year period, Lululemon has absolutely smashed the broad market and small-cap growth stocks, while matching Under Armour's fantastic returns.

Now, Foolish investors know that a five-year period is a significant chunk of time, particularly in a market in which many investors' time horizon does not extend beyond the next couple of quarters. As such, that performance is unlikely to be the product of anything other than outstanding business fundamentals. On that note, it's worth recapping a few of the company's achievements under Day's tenure:

During the five-year period ending on Feb. 3, 2013, average annual return on equity was 34.5%. Better yet, this was achieved without any recourse to leverage -- Lululemon doesn't have a dollar of financial debt on its balance sheet. Over the five-year period ended May 5, 2013, revenues grew at an annualized rate of 36.5%. That's a fantastic number in any environment, but Lululemon did this in a very tough economic climate for retail.

Does this week's share price slump present an opportunity for investors? At nearly 31 times the next 12 months' earnings-per-share estimate, Lululemon's stock remains pricey by conventional standards, and it may be dead money as Wall Street takes a "wait-and-see" approach to the leadership issue. However, Lululemon appears to have carved out a solid franchise in a very competitive area; for investors with a higher-than-average risk tolerance and a multi-year time frame, the current price could ultimately prove to be an attractive entry point.

Lululemon has the potential to grow its sales by 10 times if it can penetrate its other markets like it has in Canada, but the competitive landscape is starting to increase. Can Lululemon fight off larger retailers, and ultimately deliver huge profits for savvy investors? The Motley Fool answers these questions and more in its most in-depth Lululemon research available. Thousands have already claimed their own premium ticker coverage; gain instant access to your own by clicking here now.

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