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Four reasons why Lululemon will bounce back

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Lululemon Athletica Inc. has long proven naysayers wrong. I should know – I was one of them, dismissing the company as "a shooting star" when it went public six years ago. I've worn that call as snugly as a pair of Lululemon pants ever since.

So what to make of the company's "state of turmoil," as one analyst has described the unexpected news of CEO Christine Day's impending departure, as well as the recent production problems with its Luon pants? With the stock taking a beating Tuesday, investors should remember a few key points:

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The brand is mighty: Lululemon came on like a hot retail concept a decade ago, but has proven to have uncommon staying power for an apparel retailer. Global brand consultancy Interbrand this year named Lululemon the most valuable retail brand in Canada, valuing its brand at $3.5-billion (U.S.); at that level, it would rank number one in Germany, number two in both Japan and France, and would place among the top 25 in the U.S., worth as much as J. Crew and Banana Republic – combined.

Customers are loyal: Other retailers have tried to knock off the look, quality and comfort of Lululemon's high-priced gear; none have succeeded. Even with the pants recall (see below), same store sales grew by seven per cent in the first quarter. Sales are an astonishing $2,000-plus per square foot and the company's banner is one of the few in fashion that does as well in malls as it does on crowded urban thoroughfares. That success is migrating into international markets, where the company is expanding rapidly, as well as online: sales over the Internet now represent 15.6 per cent of revenues, up from 8.1 per cent in fiscal 2010.

Snafus happen. Fixes follow quickly. A massive recall this year of inadequately designed yoga pants was bad news, and further recalls like this could seriously damage Lululemon's all-important reputation for quality. But this was not the first product issue to hit Lululemon. Remember the false claims in 2007 that some of its clothing contained seaweed, or problems last year with dyes that ran in some clothing? There have also been products that were retired from shelves prematurely and others that were overpriced. In most cases the company acted quickly to fix the mistakes. Customers will forgive some mistakes along the way – if they are corrected promptly.

Strong financials: Even factoring in the pants recall, the company expects to earn $1.95 to $1.99 per share this year, up from $1.85 last year. The company has no debt and $590-million in cash and equivalents.

While Lululemon's financial health might not be in doubt, its stock has always been expensive. Any worrying news would have affected its valuation, which floated at around the 30-times forward earnings mark before this week's news. Investors may not be so forgiving in the short term if the company allows its state of turmoil to continue; but as long as Lululemon can maintain its blissful relationship with its customers, it should recover its relaxation pose before long.

Sean Silcoff is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights , and follow Sean on Twitter at @seansilcoff .

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