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Lululemon (LULU - Analyst Report) has been a hot stock for many investors over the past few years. The company has seen tremendous earnings growth and it has become a popular pick for investors seeking a top retail name that has potential for further gains.

In fact, in 2012, LULU added about 40%, easily outpacing the retail sector and the broad S&P 500 as well. However, 2013 hasn’t been as kind to LULU as the firm has faced a big slump to start the year, and then further issues lately thanks to quality control issues.

The company actually revealed, just a few days ahead of the earnings report, that it was recalling many pants from one of its key lines due to the see-through nature of the fabric’s sheer. This information on a line that accounts for nearly 20% of the business helped to push the stock down by nearly 7% in the past five days.

Now, with earnings coming up on Thursday investors are left with a very difficult decision; buy or sell this once high-flying stock?  

Reasons to Buy:

  • LULU has seen impressive growth rates in the past, and its PEG is still reasonable.
  • This ‘sheer’ issue with the fabric will be corrected, and now represents a great buying opportunity on a company that has plenty of room to run.
  • The firm has beaten estimates in four of the previous quarters so they clearly have the ability to match even lofty expectations.

Reasons to Sell:

  • LULU now only has a Zacks Rank of 3 or ‘Hold’. This is poor compared to where the company had been even a few weeks ago when the stock was Ranked as a Buy. The industry rank also isn’t very favorable, so this may be a wider problem going forward.
  • Analyst estimate revisions are not favorable heading into the next quarter or the next year, with near universal agreement lower.
  • Having pants that aren’t see through seems like kind of a pretty basic—and necessary-- part of the process, especially if you are spending $100 on them. Is it possible that LULU has sacrificed quality for growth and that some of the die-hards will abandon the company?

What do you think?

Is this a great time to buy a superb retailer on a dip, or is it the end of LULU’s incredible story?

Let us know in the comments below!

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