Pat McKeough responds to many requests for specific advice on investing in stocks and other questions on investment strategy and the economy from the members of his Inner Circle. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions. While we reserve our buy-hold-sell advice for Inner Circle members, these excerpts provide a great deal of information and analysis on stocks we’ve covered for members of Pat’s Inner Circle.

This week, an Inner Circle member asked about a stock that made headlines in the past week. Popular athletic wear maker lululemon is dealing with the unexpected departure of CEO Christine Day in the wake of well publicized manufacturing problems. Pat examines the company’s financial outlook and its future prospects in a competitive activewear market.

Q: Pat: Any views on Lululemon? Thanks for your advice.

A: Lululemon Athletica Inc. (symbol LLL on Toronto; www.lululemon.com), is a Vancouver-based designer and seller of yoga-inspired athletic wear and accessories. (Note that the company plans to delist its shares from the Toronto exchange on June 24, 2013. The stock will continue to trade on the Nasdaq exchange under the LULU symbol.)

Dennis “Chip” Wilson founded Lululemon in 1998, after noticing that more women were taking up yoga and other physical activities. Wilson had 20 years of experience making surfing and snowboard clothing. He believed that the all-cotton fabrics then used for yoga were inappropriate.

When Wilson opened the first Lululemon store in Vancouver’s Kitsilano Beach area in 2000, he positioned its staff not just as salespeople, but as “lifestyle educators.” Wilson invited yoga, Pilates, fitness and dance instructors to join Lululemon’s “R&D team” and give feedback on its clothes, in return for a 15% discount. He also recruited some of them to appear on Lululemon’s posters, website and postcards.

Lululemon has also developed its own stretch fabrics, such as Luon, its signature material, and Silverescent, which uses silver yarn that has antibacterial qualities (which Lululemon calls “anti-stink”). As well, all of Lululemon’s athletic wear has premium features, such as flat seams, which reduce chafing.

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Fault with top-selling yoga pants helps push executives out the door

The company owns and operates 218 stores: 51 in Canada, 141 in the U.S., 24 in Australia and two in New Zealand. Most of these outlets operate under the Lululemon Athletica banner, but eight of them sell dance-related clothes for girls under the Ivivva Athletica banner. The company also sells Ivivva merchandise online through www.ivivva.com. Starting in 2016, Lululemon plans to open stores that only sell men’s clothing.

The stock fell from around $84 earlier this month in response to the sudden resignation of Christine Day, the company’s chief executive officer for the past five-and-a-half years. Ms. Day will stay on as CEO until Lululemon hires a replacement.

Day’s resignation follows the departure of several other executives, partly over manufacturing problems with the company’s top-selling Luon yoga pants, which were too sheer. As a result, Lululemon pulled about 17% of these pants off its shelves.

In its fiscal 2014 first quarter, which ended May 5, 2013, Lululemon earned $47.3 million, or $0.32 a share (all figures in U.S. dollars). The latest earnings included a $17.5-million writedown of the defective yoga pants.

Sales rose 21.0%, to $345.8 million from $285.7 million. The big gain is largely because the company opened 38 new stores in the past year. If you disregard the contribution of these new outlets and the impact of currency exchange rates, sales would have risen 7%. Online sales jumped 40.6% and now account for 15.6% of Lululemon’s total sales.

In the Inner Circle Q&A, Pat examines Lululemon’s balance sheet and looks at whether its popular brand and base of loyal customers will be enough to keep it growing in a competitive and fickle market. He also looks at how soon the company is likely to replace its CEO and other top executives. He concludes with his clear buy-hold-sell advice on the stock.

(Note: If you are a current member of the Inner Circle, please click here to view Pat’s recommendation. Be sure to log in first.)

COMMENTS PLEASE—Share your investment experience and opinions with fellow TSINetwork.ca members

When a stock bursts on the scene in a wave of popularity like Lululemon did in 2000, do you take a wait-and-see attitude before investing in it, or do you think it’s better to try and ride the stock’s early success? Do you have specific examples of stocks that soared early and ultimately became solid long-term stocks? Or stocks that had a spectacular rise, slid back and never recovered? Let us know what you think.