Lululemon Athletica appears to have let itself go lately. But the athletic-apparel retailer may soon start turning heads yet again.
Things first went awry for Lululemon in March of 2013, when a batch of its signature "luon" nylon pants had to be recalled because they were slightly transparent. The company has since named a new CEO and announced the resignation of its chairman, who was criticized for saying Lululemon pants "don't work" for some womens' bodies. Most recently, the company said January was off to a weak start and it expected a rare decline in comparable-store sales for the fourth fiscal quarter.
All of this has hammered Lululemon shares, which are 42 percent below their peak last June. In terms of valuation, the stock looks even weaker: It trades at 21 times consensus forward earnings, the lowest since 2009.
That could have created a buying opportunity—for the company itself. While Lululemon has focused squarely on expansion until now, it probably has the flexibility to repurchase stock if the price slips much further. That's an argument made by Chris O'Donnell, a Lululemon investor who recently posted his thesis on SumZero, a private network for buy-side analysts. O'Donnell's long idea was the first positive Lululemon thesis on the site since 2011 and followed two short ideas from other analysts in 2013.
Lululemon's press office didn't respond to a request for comment, but another person familiar with the company's thinking said it hasn't ruled out a buyback.
Even as it adds stores, Lululemon looks mature enough for a modest share repurchase. Analysts estimate the company will generate $231 million of free cash flow in the year through next January, when it will have over $1 billion of net cash on its balance sheet.
Of course, buybacks can be dangerous. Best Buy famously started a buyback program a few years ago, only to see its share price continue to tumble as Amazon ate further into its business. Similarly, Netflix had to make a complete about face: It bought back over $1 billion in stock between 2007 and 2011, only to sell $200 million worth of stock in late 2011 after its share price had cratered and it was strapped for cash.
Lululemon, however, is on much firmer footing. The company continues to add stores in the U.S. without making a big dent in overall sales productivity. Analysts estimate the company's sales per square foot were 1.6 percent lower in the year through January. But that's only natural given that sales productivity is far higher in Canada where it has essentially stopped adding stores.
Venturing into the center of the U.S. need not hurt profits. Paul Lejuez of Wells Fargo points out that places like New York and San Francisco have higher rent and labor costs than more rural locations. That means future stores can have comparable profit margins even if they generate lower sales volume.
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There's also reason to expect Lululemon's same-store sells to reaccelerate. Last year's negative publicity is unlikely to be permanent unless the company makes another major goof. January's bad weather probably hit Lululemon's East Coast stores especially hard.
Lululemon also has only scratched the surface in menswear, which accounts for roughly 15 percent of sales. Likewise, the company just announced its first store in London and can probably add several more in that city alone before considering the rest of Europe.
Despite its recent woes, analysts expect Lululemon's earnings per share to rise 16 percent in the year through January 2015. With a brand that appears intact, it should't be long before the shares are in better shape.
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—By CNBC's John Jannarone; follow him on Twitter @jannarone.