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LULU: Math Matters

Takeaway: It’s critical to delineate between the brand, company and stock for a name like $LULU, which has great returns, but eroding oper metrics.

Conclusion: Let’s remove the emotion and look at the raw math behind one of the most perennially loved names in retail. It’s critical to draw delineation between the Brand, the company and the stock. We'd avoid it.



It’s so easy to like LULU.

But we have to draw a massive delineation between…a) Lululemon the Brand, b) Lululemon Athletica the company, and c) LULU the stock. The first one is great. The second is good. And the third is below-average at best.


The Long term/TAIL, growth is there for this company if it properly allocates capital into fulfilling the Brand opportunity. This is a mere $1.2bn brand (closer to $600-700mm wholesale equivalent in comparing to the NKEs and UAs of the world), and there’s no reason why it can’t get to $3-$4bn over 5-years if it continues to execute. The key here is that if you look at share of the Yoga market, and what those revenue numbers suggest, it implies that LULU will own over 100% of the Yoga space. Clearly that’s not possible. But when you look at great brands in the past, they have continually proved investors wrong by creating new spaces and filling them with product ideas that most folks like you and I cannot even foresee. LULU is one of those companies.


BUT…And it’s a big ‘but’. When we remove all the emotion around the cult stock status it’s been awarded and simply look at the math, we can’t get our hands around the eroding productivity of existing assets.


By all means, we give LULU the credit it deserves for 100%+ returns on capital. But this is by way of churning out 7x+ asset turns on 25%+ EBIT margins. Maybe one of these factors is sustainable. But if LULU sustains both – as it is priced to do – then it will be the first company in recent memory to do so, aside from Apple. Sustaining both would suggest that there is something so special about it that it is massively undervalued even at current levels. So the simple question is really – “Is LULU = AAPL?” As great as it is, we’d give that one a definitive ‘No’.


While we’re believers in the concept and the brand, we can’t make the leap to assume that it can prevent a continued rollover in new store productivity. And in fact, we’re surprised that more attention has not been paid to the issue.

Here’s some geeky math on our thought process around the different between reported comps and the change in total sales/square foot. …


Let’s assume that…

1) total store sales yy chg = (chg in comp store sales growth/square foot + new store sales/square foot) + (yy chg in comp store size + chg in new store size).

2) Therefore yty % chg comp sales = (chg in all stores revenue/sq' - chg in new stores revenue/sq') + (change in all stores size - change in new stores size). Of course, the figures within the parens must be weighted by the number of stores.

3) If store size is basically unchanged then comp growth and the YTY % chg in sales/sq' in comparable stores should be the same.  in other words, comp growth = revenue/sq' growth in comp stores, when store size is unchanged.

4) therefore the difference between reported comp growth in each quarter and the YTY chg in all store sales/sq' in the same quarter will be the YTY % change in sales/sq' at new stores.  Again, in mathematical formula form:

comp stores sales growth - yty chg in all stores revenue/sq' = yty change in new stores revenue/sq' (again weighted by the number of new and comp stores)

5) But backing this number out, yields increasingly negative growth rates in new store revenue/sq', so what are we missing?

Using 1Q12 as an example:

comp growth (GAAP): 24%

YTY chg average sales/sq in all stores: 11%

YTY % chg in average store size: 1%

Residual: 12%

number of non comp stores: 42
number of total stores at qtr end: 180


  11%=(138/180) x 24% + (yty chg in new store revenue/sq' x (42/180))

11%= 18.4% + (.223 x yty chg in new store revenue/sq')
(11%-18.4%)/.223 = yty chg in new store sales/sq'
-31.7% = yty chg in new store sales/sq'


In looking at these numbers on the heels of implied new store productivity going from 175% in 2010, to 95%in 2011, and then down another 30% in 1Q12, we think that we’re going to need to see a massive ramp in comp in order to offset this trend.


Maybe what we’re missing is the impact of dot.com, and the quirky accounting therein. Regardless, we’re going to point back to the simple ROIC calculation. Can the dot.com business grow faster than productivity at existing stores will erode? We’re not so sure. If that’s the case, then either asset turns or margins are coming down. That means that ROIC comes down. That means that a 30x+ p/e multiple matters again.


Will all of this come out with tomorrow’s print? Maybe. Maybe not. But we definitely would not touch the stock in advance of the quarter.The downside if this trend perpetuates is far worse than the upside would be if it reverses.


If I gave Keith the fundamental OK, he’d likely short this stock in a heartbeat.


TODAY’S S&P 500 SET-UP – September 6, 2012

As we look at today’s set up for the S&P 500, the range is 16 points or -0.39% downside to 1398 and 0.75% upside to 1414. 











  • ADVANCE/DECLINE LINE: on 09/05 NYSE -148
    • Decrease versus the prior day’s trading of 541
  • VOLUME: on 09/05 NYSE 675.64
    • Increase versus prior day’s trading of 5.70%
  • VIX:  as of 09/05 was at 17.74
    • Decrease versus most recent day’s trading of -1.33%
    • Year-to-date decrease of -24.19%
  • SPX PUT/CALL RATIO: as of 09/05 closed at 2.15
    • Up  from the day prior at 1.17


  • TED SPREAD: as of this morning 30.84
  • 3-MONTH T-BILL YIELD: as of this morning 0.10%
  • 10-Year: as of this morning 1.62%
    • Increase from prior day’s trading of 1.60%
  • YIELD CURVE: as of this morning 1.38
    • Up from prior day’s trading at 1.36

MACRO DATA POINTS (Bloomberg Estimates)

  • 7am: Bank of England monetary policy committee decision
  • 7:30am: Challenger Job Cuts Y/y, Aug. (prior -44.5%)
  • 7:45am: ECB ann. interest rates; governing council meets
  • 8am: RBC Consumer Outlook Index, Sept. (prior 46.4)
  • 8:15am: ADP Employment Change, Aug., est. 140K (prior 163k)
  • 8:30am: Init. Jobless Claims, 9/1, est. 370k (prior 374k)
  • 9am: U.S. announces plans for sale of 3-year notes, 10-year notes, 30-year bonds
  • 9:45am: Bloomberg Consumer Comfort, Sept. 2 (prior -47.3)
  • 10am: ISM Non-Manuf. Composite, Aug. est. 52.5 (prior 52.6)
  • 10am: Freddie Mac mortgage rate survey
  • 10:30am: EIA natural gas storage
  • 11am: DoE weekly inventories
  • 11am: Fed to purchase $1.5b-$2.0b notes due 2/15/2036-8/15/2042
  • ICSC Chain Store Sales Y/y, Aug. (prior 1.9%)


    • Democratic National Convention in Charlotte, N.C.; Obama will formally accept his party’s nomination for president, outline his goals for nation
    • Bill Clinton nominated Obama for re-election at DNC
    • Fed releases financial disclosure forms of Chairman Ben Bernanke, other board members, 10am
    • House, Senate not in session
    • Negotiators for U.S., eight other Pacific-rim nations will tackle protections for intellectual property, such as pharmaceuticals, in talks in Leesburg, Va., through Sept. 15


  • Draghi credibility at stake as mkts look to ECB to save euro
  • Supervalu to close 60 stores, take pretax charge
  • Growth in U.S. service industries probably eased in August
  • Clinton nominates Obama for re-election at Democratic Convention
  • AIG selling about $2b of AIA Group shares, terms show
  • Australia jobless rate unexpectedly falls, boosts currency
  • Spain sells EU3.5b of debt, meeting maximum target
  • Qantas allies with Emirates on Europe flights, ditching BA
  • Apple rivals try to outshine next IPhone with cool features
  • Amazon readies Kindle Fire update to keep up with Apple, Google
  • Apple urged by China dissident to act against one-child rule
  • Goldman Sachs sued by BayernLB over losses on mortgage bonds
  • Health Net ties to veteran-owned firm probed by agency watchdog
  • Apple TV no IPhone as talks bog down with media companies
  • Bloomberg Canada-Asia Dialog includes talk by Canada PM Stephen Harper


    • Navistar International (NAV) 6am, $(1.41) - Preview
    • Descartes (DSG CN) 6am, $0.14
    • Transcontinental (TCL/A CN) 7am, C$0.42
    • UTI Worldwide (UTIW) 8am, $0.23
    • Hovnanian (HOV) 9am, $(0.14) - Preview
    • North West Co (NWC CN) 10:01am, C$0.36
    • Quiksilver (ZQK) 4pm, $0.06
    • Ulta Salon Cosmetics & Fragrance (ULTA) 4:01pm, $0.51
    • Mattress Firm Holding (MFRM) 4:01pm, $0.28
    • Cooper Cos (COO) 4:01pm, $1.29
    • Infoblox (BLOX) 4:14pm, $0.01



GOLD – the more wrong I am immediate-term on short gold is the more right I’ll be on #GrowthSlowing – one perpetuates the other; Oil back up to $114 this morning as Gold gets pinned at a lower-high vs Feb with a singing -0.91 immediate-term correlation to Down Dollar, Up Euro.


COPPER – all the while, the Doctor doesn’t seem to care much for the gong show either (down this morning, failing at long-term TAIL risk support of $3.85lb, well off its $3.95 high made in Feb).

  • Hurricane Leslie Strengthens En Route to Bermuda, Canada
  • Platinum Buying Expands as Mining Strikes Escalate: Commodities
  • Gold Gains to Highest Since March as Euro Rallies on ECB Plan
  • UN Sees No Reason for Food Crisis as Prices Stabilize in August
  • Oil Rises a Second Day on U.S. Supply Drop, ECB Plan Optimism
  • Soybeans Drop to One-Week Low as U.S. Harvest May Top Forecast
  • Copper Trades at $7,686 a Ton as ECB Leaves Rates Unchanged
  • Goldman Sachs’s Currie Says Commodities May Jump Another 10%
  • Cocoa Reaches 11-Month High Even as Rains Improve; Coffee Falls
  • Rubber Advances as European Central Bank May Act to Tame Crisis
  • Jefferies Aims for Top Five Ranking on the London Metal Exchange
  • Cars Beating Plastics Makes Asia Gasoline Winner: Energy Markets
  • Asia Naphtha Profits Fall; Fuel-Oil Losses Narrow: Oil Products
  • Platinum Buying Expands Amid Mining Strikes
  • Goldman Sachs’s Currie Says Commodities May Advance Another 10%
  • Palm-Oil Veteran Mistry Says Indonesia Has ‘Hidden’ Reserves
  • Palm Oil Drops to Lowest Level in Three Weeks on Higher Supplies














ASIA – Asian equity markets don’t seem to care much for this Western central planning gong show anymore; the higher expectations for money printed from the heavens get, the lower real inflation adjusted growth expectations go – pretty simple; Japan was flat, HK +0.34%, and Singapore was -0.3%; doing nothing, treading on 6wk lows.










The Hedgeye Macro Team

Faustian Investing

This note was originally published at 8am on August 23, 2012 for Hedgeye subscribers.

“In the end, you are exactly—what you are. Put on wig with a million curls,

Out the highest heeled boots on your feet, Yet in the end you remain just what you are.”



Today is August 23rd.  To many of you stock market operators, it is just another day of finding compelling investments and tweaking those market exposures.  But for those of you who didn’t know, it is also National Compliance Officer Day.  So take a few minutes and go see that guy or gal who runs your compliance department, who you typically like to avoid, and give them a big thank you.


One of the first hires at Hedgeye was our compliance officer, Rabbi Moshe Silver.  Not only would I put his knowledge of the compliance up against anyone’s, but he is also kind of funny.  By kind of I mean he tells jokes, even if they aren’t all funny.  In all seriousness, Moshe, on behalf of all of us, thank you for your fine work as our compliance officer and teammate.


Now that I officially have my compliance officer off my back for a few months, let’s get back to the global macro grind.  A topic I want to start with today is China.  Maybe you’ve heard of it? It’s the country that has taken a massive amount of economic market share over the last two decades.  I just wanted to flag a few interesting nuggets from China over the last couple of days.  They are as follows:

  • Chinese iron ore prices are at their lowest levels since 2009 and mills are beginning to default on supply contracts;
  • Zhang Honxia, chairman of China’s largest cotton-textile maker, said: “The Chinese economy is only at the beginning of a harsh winter.  We are in worse shape now then compared with 2008-2009.”;
  • Iron ore output in China is down 8.1% in July;
  • The Shanghai Composite hit a three-year low yesterday;
  • Japanese exports to China in July were -11% year-over-year; and
  • The IMF has estimated that China’s capacity utilization has fallen to just 60% versus 80% in the pre-crisis era.

To be clear, I didn’t hand pick those data points to paint some bearish mosaic.  They are actually just what I wrote down in my notebook and, candidly, they are a little depressing as it relates to Chinese growth.


Last night’s PMI readings were of similar nature, if not worse, for China.  In aggregate, the PMI for August fell to 43.0 from 45.1 in July.  The specifics were even more dreary, new orders fell to 46.6 from 48.7, new export orders slumped to 44.7 (the lowest reading since the financial crisis), and inventories rose to 53.6.  Inventory up and orders down are a toxic mix for any company, let alone the world’s second largest economy.


Despite this plethora of negative data points, the equity markets keeps grinding higher.  Perversely, bad news is good news because bad news means more central bank easing.  The only term I can really think of for this type of investing (and no offense to those of you that are profiting from it) is Faustian Investing.


As many of you know, Faust is a protagonist in a classic German legend.  He is a very successful scholar, but like many successful people, he wants more.  As a result, Faust makes a deal with the devil and exchanges his soul for unlimited knowledge and worldly pleasures.  To me, buying equities at a VIX of 15.1 on hopes of further easing from central bankers feels like a deal with the devil.  Incidentally, there is a gentleman named Jon W. Faust who is a special advisor to the FOMC Board of Governors.  And I couldn’t make that up even if I wanted to …


Speaking of easing, many have asked our view of whether some incremental news on the monetary policy front could come out of Jackson Hole next week.  I will touch on that in a second, but let me just start with this, it is likely priced in.  The SP500 is up 11% in almost a straight line from the lows of the summer into Jackson Hole.  And from interacting with our many subscribers and even more followers on social media, this is the “catalyst” people are talking about.


Now, as to whether the Fed will actually do anything next week is a different question.  The key economic takeaway yesterday from the release of the FOMC’s minutes was that, “economic activity increased at a slower pace in the second quarter than earlier in the year and that labor market conditions had improved little in recent months.”  So as a result:


“Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.” 


There you have it: the Fed is poised to ease!  I’m just not sure it will be at Jackson Hole next week.  The last time Bernanke announced action at Jackson Hole was QE2 in 2010.  At that point, equity markets had undergone a serious two month sell off, the government had just lowered its reading Q2 2010 GDP growth to 1.6%, and broad economic indicators were more anemic than they are now (we will have a detailed post on this later today). 


So in summary, we think any potential action at Jackson Hole is both unlikely and also priced into equities.  To express this from a non-Faustian investing perspective, yesterday in the virtual portfolio we bought the U.S. dollar and shorted gold.


The greater question, though, is whether incremental easing will have any impact on economic activity. In the Chart of the Day below, we show both major recent Fed policy announcements in Q3 2007 and Q3 2010 and subsequent global economic activity.  In both instances, growth slowed and inflation accelerated.  Be careful what you wish for from those devilish central bankers.


Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr UST Yield, and the SP500 are 1621-1679, 113.71-116.12, 81.41-82.11, 1.23-1.25 (TREND resistance = 1.26), 1.66-1.75% and 1410-1419, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Faustian Investing - Chart of the Day


Faustian Investing - Virtual Portfolio

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.51%
  • SHORT SIGNALS 78.32%

Gambling #Unlimited

“Rather than a gambler, he was a speculator with an eye for good risks.”

-Carl Sandburg


That’s a quote from one of the better opening chapters I have read in 2012, “God’s Chosen Instrument”, in Jay Cooke’s Gamble – “The Northern Pacific Railroad, The Sioux, and The Panic of 1873.” (by M. John Lubetkin)


Few in this profession want to admit that there is a degree of gambling in what they do. But what, per se, would you call what we have all been forced to do in the last 6 months? Even if you have perfect inside information on what Draghi is going to do this morning, the market could do the exact opposite of what you think it should do on that.


Inside information? If you don’t think someone always knows something, you need “more time” on the job too. That’s as old as Jay Cooke’s legend in becoming the “financier of the Civil War.” One of the market’s richest men (before it all crashed in 1873), “Cooke bought members of Congress, bribed 2 Vice Presidents, built churches…” (page 1) etc., but still blew up his unlimited capital bet, in the end.


Back to the Global Macro Grind


#Unlimited – that’s what she said. As in the woman who wrote this morning’s manic media headline on why the US stock market futures were up 8 handles. “Stocks rise on possibility of unlimited ECB bond buying.”


Imagine that for 3 more minutes. Never mind the most money ever printed into a central planning event… ever… by 9AM EST, “unlimited” moneys will fall from the heavens, Gold will go to $3000 and Oil will go to $200?


The storytelling out there is just getting awesome.


I’m short Gold here. On balance, until turning bearish on Gold in Q1 of 2012, I have been a Gold bull since 2003. I have #timestamped 35 long/short positions in the GLD since founding the firm in 2008 (been right 30x).  


The more wrong I am on Gold (from here), the more right I’ll be on #GrowthSlowing.



  1. Inflation is not growth
  2. Inflation slows growth

So, if you are still hoping for economic growth, but at the same time want the Italian Eurocrat to go “unlimited”, Weimar-style, on the printing presses this morning, just be careful what you are cheering for.


Rather than roll the bones on what rumor is going to hit my tweet-stream next, this is what I am going to do on green this morning.


Drum-roll: sell.


That’s not my perma position (7 of my last 10 booked gains have been on the long side, and we’ve bought almost 50 tickers since the May-June 2012 lows). That’s just what I do (on green) at the high end of what we call our Risk Management Range.


When I give you my Risk Ranges at the bottom of the Early Look every morning, those are the immediate-term ranges of price risk that I am using to make my buy and sell decisions. Rather than a gambler, I’m just good at being disciplined, not swinging at outside pitches.


Since I wasn’t a good baseball player (I am Canadian), what other choice do I have? It’s hard enough to hit the big fat fastball of perfect information in this market when you feel like you see your pitch.


If markets haven’t humbled you yet, they will. If central planners think they have markets nailed now, they are about to get nailed.


With those long-term risk management realities vs. short-term rumors in mind, here are your risk ranges, across asset classes this morning:

  1. US Dollar Index = 81.11-81.89
  2. EUR/USD = 1.24-1.26
  3. US Treasury 10yr Yield = 1.54-1.63%
  4. CRB Commodities Index = 303-309
  5. SP500 = 1
  6. VIX = 16.91-18.92
  7. Russell2000 =  812-825
  8. Shanghai Composite = 2016-2089
  9. Nikkei (Japan) = 8
  10. EuroStoxx50 = 2
  11. DAX (Germany) = 6
  12. IBEX (Spain) = 7
  13. Oil (Brent) = $111.96-115.36
  14. Gold = $1
  15. Copper = $3.47-3.52

People can call me a gambler. They can call you a lover. They can call us “perma” whatever they want if the storytelling makes them feel certain about something that’s uncertain. The only thing I am certain about this morning is what my process is telling me to do next.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Gambling #Unlimited - Chart of the Day


Gambling #Unlimited - Virtual Portfolio


Gaming Investor Trip Schedule



Hedgeye Gaming, Lodging, and Leisure is hosting three upcoming investor trips.  If you are interested in joining us for any or all of the trips, please contact Hedgeye Sales or the GLL research team and we can send you further details.


  • September 11-14th  (MACAU-SINGAPORE):  Anna Massion will be hosting meetings with the operators, junkets, and other contacts in Macau and Singapore.  Our meetings in Macau will take place between September 11-13th and meetings in Singapore will take place on September 14th.
  • September 26-27th (LAS VEGAS):  Todd Jordan will be hosting management meetings with the Vegas-based operators as well as with IGT and BYI.  We want to get the scoop on G2E when many investors will be out in Las Vegas meeting with the same companies.
  • October 1-3rd (G2E LAS VEGAS):  Anna will be hosting meetings with suppliers, slot floor managers and other select contacts during G2E.

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.