Are Lululemon's Troubles Behind It?

Last week, fashion-forward athleticwear company lululemon athletica  joined the relatively large group of apparel retailers to take a significant dive this quarter. For the industry at large, the issue has been one of poor consumer spending habits, but for Lululemon, the implications may go deeper. The year 2013 has been a terrible one for the company, as Lululemon shed more than 20% of its market value while experiencing the ultimate wardrobe malfunction. Now, with a new CEO set to take the reins in January, the company must prove to investors and analysts (and even customers) that its phenomenal growth story has not ended prematurely. Here's what you need to know.

Earnings recap
In isolation, Lululemon's third-quarter earnings would look pretty impressive, considering the period was one of widespread tepidity in shopper traffic. Net sales grew 20% to $379.9 million, while same-store sales grew a commendable 5%.

On the direct-to-consumer front, sales jumped 37%. This channel now accounts for more than 16% of the company's total sales.

Moving down the income statement, some margin contraction kept the numbers from growing as much as sales. Income from continuing operations grew just 14.6%, to $92.3 million. Net income hit $0.45 per share -- up from $0.39 per share in the third quarter of 2012. Still, both top and bottom lines beat estimates.

Ultimately, investors ran scared from the stock as Lululemon forecast much lower sales ahead for the fourth quarter, and cut its full-year guidance. Same-store sales are forecast to be flat, with the company earning $535 million to $540 million in net sales for the fourth quarter. Full-year 2013 EPS is now expected to be in the range of $1.94 to $1.96 per share.

So, here we are faced with a company that so recently was a market darling -- its five-year return remains well over the 1,300% mark -- and a retail phenomenon, and now can't seem to catch a break. Furthermore, it retains a relatively rich valuation at nearly 25 times forward earnings. What are investors to do?

Combo hit
As many retail-focused investors have heard in recent months, this is considered a highly promotional retail environment -- meaning stores are discounting goods to move them out. Lululemon has long refused to discount its expensive athleticwear so as not to sully its image. In good times, this gives the company great margins compared to its peers. In bad times, things look like they do now.

With a new CEO (formerly of Tom's Shoes and, before that, Burton) in the hot seat starting in January, the company has a chance at starting fresh for 2014, but economic conditions aren't going to improve at the stroke of midnight. For Lululemon to get a breath of fresh air from consumers, investors, and analysts, it needs a spend-happy shopper. Add to that the company's still-hefty valuation, and it's looking like an uphill road for Lululemon. Investors intrigued by the recent fall in stock price should probably wait for the stock to stretch further down before playing a turnaround.