Shares of Lululemon (LULU) are taking a very un-zen like beating in trading Thursday. The embattled makers of high-end athletic wear reported Q3 earnings of 45-cents a share on 20% revenue growth that beat estimates. But the company spooked the street by taking down guidance for Q4. Specifically, management said it expects earnings of 78 - 80-cents per share on revenues of $535 - $540 million. Analysts were expecting EPS of 84-cents on $574 million in revenues.
While Wall Street’s reaction is negative it would be an overstatement to say Lululemon’s negative outlook comes as a shock to followers of the company. For those in needs of a refresher course on Lulu’s horrible year:
In March the company had to recall a massive number of its trademark pants after customers complained that they were all but transparent.
In June long-time CEO Christine Day in June resigned. When asked why she stepped down Day simply responded “my values include discretion,” a comment equal parts cryptic and damning.
In November Lululemon founder Chip Wilson violated basic rules of retail and human decency when he explained away yet more quality issues by blaming the customers themselves. “Frankly some women’s bodies just actually don’t work for [wearing Lululemon pants]… it’s really about the rubbing through the thighs, how much pressure is there over a period of time, how much they use it,”
In today’s conference call management said store traffic was strong in Q3 but flat in recent weeks. While not using Wilson’s comments as a specific excuse, executives conceded that negative publicity did seem tightly linked to a fall-off in shoppers.
Despite all of the above in the attached clip Jon Najarian of OptionMonster.com and I explain why we’re both bidding for LULU shares in early trading. Why the optimism? Three good reasons:
1. Chip Wilson is leaving and there’s a new CEO in town
As discussed earlier this week, Lululemon appointed Laurent Potdevin to replace Day. He’s not a household name but Potdevin has fashion, retail and liberal credentials that suggest he’s a perfect choice to bring the company to the next level.
Not to mention the best thing about Potdevin: He’s not Chip Wilson and is therefore unlikely to blame design problems on his customers’ fat thighs.
2. There’s evidence that Lululemon has finally realized it’s a retailer
In today’s conference call management suggested they’re looking into promotional pricing and broadening its appeal. That may sound like retail 101 but until now LULU has been able to thrive while almost willfully ignoring the basic rules of merchandising. Not only that, but as bad as things have been this year the company saw positive traffic right up until the point that Chip Wilson suggested 25% of America wasn’t fit to wear his company’s clothing.
Managment also announced an increased focus on its on-line operations. Again, retail 101 but an area that’s been sorely lacking as anyone who’s tried to use the site can attest. Suffice it to say it’s much cheaper to expand via shipping than it is to build new stores nationwide.
Lululemon all but ignored the fact that its currently Christmas. It seems like an opportunity they may explore this time next year.
Longtime Breakout loyalists are painfully aware of my personal obsession with Lululemon’s insistence on ignoring men. The company makes by far the best workout gear available. It’s durable, comfortable and good looking An even bigger secret is the fact that Lululemon carries great business casual work slacks. Why aren’t you aware of that already? Probably because the pants don’t come in sizes bigger than 40” around the waist (the average male waist according the CDC) and the clothes are buried in the back of the store.
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Lululemon says menswear currently accounts for a mere 13.5% of total revenues but the division is growing at a greater than a 20% clip. One of the top priorities for 2014 is expanding men’s selection, creating a brand presence and exploring ways to better “connect with male guests."
As Najarian notes, shares of Lululemon may not bounce today or even tomorrow but the long-term prospects on a fundamental level have gotten much better while the stock has fallen $10 in one day. It’s not advice but from a risk to reward perspective traders could do worse than taking a shot at getting long shares of LULU with a stop somewhere in the $50s.
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