LULU stock is under pressure today resulting from inventory expansion that exceeds sales growth by 2% and the closely related supply chain issues relating to getting stretch pants to the right stores at the right time. The company appropriately modestly reduced forward guidance to accommodate the rationalization of the supply chain. Those are the negatives. The positives are a near cult like loyalty from a high disposable income group of hybrid sports/fashion enthusiasts. The look and feel cool while you sweat set has propelling LULU to high sames store sales and industry leading margins.
This morning CNBC Fast Money show suggested that the combination of an attractive stock price, high growth/margins, and an open CEO seat, is attracting attention from NIKE and others who seek to accelerate their entry into the look sexy wile you get fit crowd. A bid from NIKE........would result in a short squeeze for the 17.6% short sellers in LULU to cover their positions.
The stock technicals are also telegraphing an oversold condition. The Stochastics at 25-27 are at the far end of the oversold/overbought continuum.
In summary, at these prices the risk adjusted reward is strongly biased to favor near term share appreciation.
I also caught the CNBC segment that featured LULU and the prospect for a Nike acquisition. The options trading in both stocks suggests that this is plausible. Investment banks are highly motivated to make it happen. Nike has the market capitalization, cash, and, access to low cost debt that makes this doable. The deal could be acretive to Nike given LULU's depressed share price. The departing CEO,doing almost all of the insider selling, is incented to leave on a high note by effecting a merger with a strong partner like Nike.