Thursday, December 9, 2010

Luckily Covered lululemon Athletica Short

Back in September, the Opportunistic Levered (Arbitrage) portfolio attempted to hedge some gains with a short in lululemon Athletica (LULU). LULU had a big surge on earnings back then and seemed very stretched on a valuation basis.

Well 3 months later and the stock is jumping again on the back of strong earnings. The stock jumped as much as 19% on the back of earning $.36 easily surpassing estimates of $.25. Same store sales were up a whooping 29%.

LULU also forecast numbers that will easily surpass estimates in Q4 with a high teens percentage rise in same store sales. That is phenomenal growth. Maybe they are worth the high multiples after all.

Going forward, based on a rough estimate from the guidance it seems the high end of estimates for 2011 (Jan 2012) might top out at $2. Based on the current $64 stock price, the forward PE is a lofty 32. Sure they are growing that fast this year, but will that growth be sustainable. Also for a retail operation they now have a Price to Sales ratio of 7. That is extremely lofty suggesting that margins might be stretched to the max as typically happens with such strong comps.

Interesting that the stock topped out at $66.66 today. Are four 6s bad? Anyway, luckily the short was covered back on October 26th at $46 (yikes the stock is up 43% since) as it became apparent that high end retail was thriving and the stock of LULU wasn't going to be broken. Too difficult to play at this point, but might become a good short when the momentum breaks.

Via PR:


  • Net revenue for the quarter increased 56% to $175.8 million from $112.9 million in the third quarter of fiscal 2009. Net revenue from corporate-owned stores was $143.2 million for the quarter, an increase of 46% from $98.1 million in the third quarter of fiscal 2009, and comparable-store sales increased by 29% on a constant-dollar basis.
  • Gross profit for the quarter increased by 72% to $96.8 million, and as a percentage of net revenue gross profit increased to 55% for the quarter from 50% in the third quarter of fiscal 2009.
  • Income from operations for the quarter increased by 103% to $42.4 million, and as a percentage of net revenue was 24% compared to 19% of net revenue in the third quarter of fiscal 2009.
  • Diluted earnings per share for the quarter was $0.36 on net income of $25.7 million, compared to diluted earnings per share of $0.20 on net income of $14.1 million in the third quarter of fiscal 2009. 

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