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RIIQ Pro Newsletter

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In Today’s Newsletter

• Lulu Management’s Missteps: When making any investment decision relative to stocks, it’s critical to also evaluate the quality of a company’s management.

• Taking accountability for management missteps is an attractive characteristic of quality leadership.

• How Short-term Hiccups Potentially Create Market Opportunity.

• Maintain a long-term outlook as applies to investing.

Deep-Dive

INTRO

Today, we're going to talk about Lululemon Athletica because it's a hot topic right now; a lot has happened and it's been reflected in its share price. Let's take a look!

Once again, we won’t drown you in complex math or take more than a few minutes of your time. As we've said before on Raising Investor IQ, information is power. Before making any investment decision, you need to seek out the information you need to make an informed decision.

Now let’s dive in!

A Little Background

Lululemon Athletica, founded in 1998, is a top player in the sports and yoga apparel game, famous for its high-quality leggings and gear. Recently, though, the company's stock has taken a dive (down -54% year-to-date, meaning since January 1^st).

Why? It’s a mix of things: tougher economic times leading to lower consumer spending and some management missteps like a limited product range and stock shortages. These issues have hit sales and shaken investor confidence.

How Macroeconomic Conditions are Rocking Lululemon

Lululemon Athletica (LULU) is having a rough year, and it’s not just because of the gloomy economic outlook. Sure, the tough times are making everyone tighten their belts, but there’s more going on behind the scenes at Lululemon. What’s really happening with this athleisure giant?

When the economy hits a rough patch, people cut back on non-essentials—like that cute new pair of leggings. Lululemon isn’t the only brand feeling this squeeze; it’s a broader trend affecting many apparel companies. But let’s zoom in on Lulu and see what’s really causing the turbulence.

Even though the economic downturn is a big part of the story, Lululemon’s internal issues are making things worse. The company’s leadership has admitted to some mistakes, especially in their women’s line in the U.S. This isn’t just a minor glitch; it’s having a noticeable impact on their performance.

Management Oopsies: what went down?

When making any investment decision relative to stocks, it’s critical to also evaluate the quality of a company’s management. This is a more subjective feat, since assessing quality leadership involves more qualitative analysis as opposed to simply looking at the numbers.

Carefully evaluate management’s decisions via recent articles, publications, and investor relations docs. Dig into the key strategic decisions being made by management, along with how they are allocating capital resources.

So, what’s the deal with Lululemon’s management? They’ve fessed up to a few key errors. For starters, they’ve had trouble with a limited color palette and a narrow range of products, particularly leggings. This lack of variety and issues with stock, especially in smaller sizes, have definitely hurt their performance. They also offer substantial discounts, which may have caused customers to become accustomed to such discounts and therefore reluctant to buy full-price products.

In a recent earnings call, Lululemon’s execs owned up to these problems. This is a key attribute of quality leadership though - taking accountability for management missteps. 

They pointed out that while customers liked the available colors, there just weren’t enough options. Plus, stock shortages in smaller sizes were a recurring headache. These aren’t just minor hiccups; they’re major issues that show the company’s struggles aren’t just about the economy but also about how they’re running things.

Short-Term Struggles, Long-Term Potential

It’s easy to get bogged down by the current struggles, but let’s take a step back.

Lululemon isn’t down for the count just yet. They’ve got a strong brand and a history of bouncing back from tough spots. If they can tackle their management issues and tweak their strategies, there’s a real shot at a comeback. 

For investors, the question is whether to buy now and hold through the rough patches or wait for things to stabilize a bit more. Either way, there’s a chance that the current undervaluation could present a solid buying opportunity.

The stock is trading at record low multiples, setting a low bar for outperformance and making the long-term payoff for LULU attractive. And Lululemon is arguably the highest quality company in its industry, dominating for decades and building a moat in its brand and footprint. Let’s dig in a bit deeper…

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