$LULU Q3 Earnings Preview

by Dan December 4, 2012 1:46 pm • Commentary

Event: LULU reports their Q3 earnings Thursday, Dec 6th after the close.  The options market is implying about an 8% move following the print, which is a bit rich to the 4 qtr & 8 qtr avg moves of about 6.5%.  

Sentiment:  Wall Street analysts remain fairly mixed on the stock with 12 Buys, 9 Holds and 1 Sell, with an avg 12 month price target of about $82.  Short interest has risen a tad of late and now sits at about 14.50 of the float.  The only meaningful insider transaction in the last few months, was LULU’s CEO’s exercise of about 83,000 options for prices ranging btwn $9.46 and $11.01, and selling them for btwn $74.25 and $74.64, leaving her with direct holdings of only 35,000 shares.

Price Action / Technicals: The stock has had a heck of a year, up 53% ytd, dramatically out performing most of its consumer discretionary peers, and more than doubling the 23% ytd gains in the XLY.

The chart has been a monster since the 2009 lows, making a series of higher highs and higher lows right up to this past spring where the stock peaked after registering 600% gains in that time period.  A move lower, to the low $60s would represent a decent support level in the near term, while still holding the long term uptrend.

[caption id="attachment_20099" align="aligncenter" width="490" caption="LULU 3 yr chart from Bloomberg"][/caption]


On a shorter term basis, the stock has formed a fairly interesting wedge that looks very likely to be resolved in the near future, with 65 serving as near term support.

[caption id="attachment_20101" align="aligncenter" width="490" caption="LULU 1 yr chart from Bloomberg"][/caption]

I’d als0 mention that the 200 day and 50 day moving averages have converged  in this area, with the 50 day slightly above the stock at 71.80 and the 200 day slightly below at 68.50.

Implied Vol Snapshot:  30 day at the money IV has gotten as high as high as 60 prior to the last 2 earnings reports.  December weeklies are trading around 100 vol as they will have 1 day to trade following the results. Jan is just under 50. IV across most months will probably fall to 40 or the high 30’s following earnings.

[caption id="attachment_20105" align="aligncenter" width="490" caption="LULU 30 day at the money IV vs 30 day Realized"][/caption]


Expectations:  The shorts have been on LULU’s trail for the past year because of its rich valuation (trades at 31x next years expected earnings), particularly in what the bears perceive as a faddish sector.  The company’s performance, however, has proved the bears wrong in the past couple years, with earnings growing 50%+ over the last 2 years.  Going forward, earnings becomes even more important as growth expectations in the analyst community is around 25% over the next 2 years.  Along those lines, guidance and commentary from management will be very closely watched.  Back in early Sept, when the company reported Q2 earnings they raised guidance for the balance of the year and stated that comparative store sales for the first 2 qtrs of the year were 20%.  Analyst consensus for next year is predicated on a deceleration in comp sales to the mid teens.

My View:  I would place this stock, the sentiment around it, and its ability to defy logical valuations for a retailer in the AMZN camp, shorting a stock like this on valuation makes little sense, but getting in front of sales slowdown or margin compression is likely the only way to make money on the short side.  There are few retailers growing like this in this environment, and bulls would argue, with 95% of their sales coming from North America, that the company’s growth has barely scratched the service.  I am more likely to throw this company and their products in the CROX and DECK category and as soon as the fad is up, the stock will be done, or at the very least the stock will be revalued.

I see 4 likely scenarios following Thursdays report:

1. company beats Q3 slightly, guides Q4 in line, stock trades up  a few % (35% probability)

2. company reports Q3 in line to previous guidance, leaves Q4 guidance intact, stock is up or down a few %.  (35% probability)

3. company mildly disappoints on recently raised guidance, leaves Q4 guidance intact, stock sells off 4-8% (20% probability)

4. company reports miss on Q3 and guides Q4 down and the stock is down at least 10% (10% probability)