$LULU Fiscal Q1 Earnings Preview

by Enis June 10, 2013 1:21 pm • Commentary

Event: LULU reports fiscal Q1 earnings this afternoon after the close.  The options market is implying ~7% move which is a tad shy of the 4 qtr avg move of ~7.75%.

Sentiment:  Wall Street analysts are fairly neutral on the stock with 11 Buys, 11 Holds and 4 Sells with an avg 12 month price target of ~$82.  Short interest has moved quite a bit higher over the last year, to new 4 year highs, now at around 23% of the float:

5 year chart of Short Interest in LULU, Courtesy of Bloomberg
5 year chart of Short Interest in LULU, Courtesy of Bloomberg

The top 5 shareholders own about 63% of the shares outstanding.

Options Open Interest:  Call to Put open interest is at 0.86, indicating more interest on the put side, another indication of short side interest.  The 1 month average though has favored calls to puts by 1.2 to 1.

Price Action / Technicals:  The stock actually made a minor new all-time high last week, and is holding above the important 80 level which served as resistance for most of the past year:

3 year daily chart of LULU, Courtesy of Bloomberg
3 year daily chart of LULU, Courtesy of Bloomberg

The stock is actually close to unchanged over the last year, carving out a 60-80 range for much of the past 6 months.  On a technical basis, the earnings move will likely either confirm the breakout or result in a breakdown that traps buyers who got involved above 80.

Fundamentals: While the technicals look attractive, the valuation looks very, very stretched.  Whether we use price/earnings (around 45x, with expected growth of 15-30% over the next few years), price/sales (8.6x, far above other retailing cult stories like KORS at 5.5x or UA at 3.3x, and even approaching TSLA, at 12.5x; LULU isn’t exactly comparable on the revolutionary spectrum to TSLA), or market cap per store (around $50 million per each store), the valuation looks extremely rich.

Investors in the stock are clearly betting on the stock to grow into its valuation, but the bar seems to be set very high in this name, with little margin for error.

Volatility:  Vol has moved higher into the earnings event, similar to the March earnings release. The realized volatility has actually been below average for much of 2013, as the stock has exhibited rangebound price action. Expect IV to fall to about to the mid 30′s following the report. Here’s IV30 vs HV30 from the past year:

30 day IV (red) in LULU vs. 30 day RV (blue) over the past year, Courtesy of LiveVolPro
from LiveVol Pro


MY VIEW:   LULU has almost tripled earnings in the past couple years, an impressive achievement that has resulted in the stock going from 20 to 80 since 2010.  Investors in the name are expecting continued breakneck growth for this category killer.

But from a valuation perspective, an awful lot is priced into the stock.  I’d be wary of fading the stock’s strength based solely on valuation, especially given the strong technical setup and high short interest, but I would be equally wary of an entry on the long side here given the lack of valuation support.

The implied move and volatility also look fairly priced, so going to stay away from this name for now.