LULU: They Blew It

Takeaway: LULU needed to shore up confidence after 1Q product issues. They blew it. There's margin risk. Maybe not a short. But definitely not a long.

This note was originally published June 10, 2013 at 21:02 in Retail

Conclusion: LULU had to do one thing and one thing only this qtr -- instill confidence in the investment community that the recent product issue was a one-off, and it that management is on offense. Unfortunately, LULU blew it. Its quarter was hardly squeaky clean, the outlook is cloudy, and the CEO tendered the most surprising resignations we've seen in retail in a while. This remains a great global growth story in retail -- one of the best, actually. But there's margin risk to the downside. That matters at 33x earnings. It might be a lousy short. But we'd avoid it long.


LULU: They Blew It - lulu1



In the wake of the Luon pant fiasco throughout the first quarter, there was one thing and one thing alone that LULU needed to do with this print -- and that's instill confidence with the investment community that the right team is steering this ship, and that the issues that caused the stumble are temporary and not a sign of more systemic issues at the company. Unfortunately, the company dropped that ball with the announcement that Christine Day is resigning her post of CEO after 5 1/2 years on the job.


Quite  frankly, we were stunned by the announcement. For investors, this is the corporate equivalent of being bitten by your Golden Retriever. There was no warning. Usually when something happens so suddenly, it is the Board's decision, but this one sounds like it was all Christine. Could it be that the Luon pant debacle took its toll on her? Perhaps. But she already canned LULU's Chief Product Officer in April, and the company is in the process of broadening its executive team.  We'd be surprised if her departure was due to this issue alone.


Our sense is that Ms. Day -- who is held in extremely high regard by the investment community -- simply sees that the next leg of growth will be tougher to come by. To her credit, she saw the company through the period in '09 when it was a $3 stock and drove it up to $80. That's $11.2bn in value creation -- or a 27-bagger for those keeping score.


While LULU had several wins this quarter, like golf, tennis, men's and e-commerce, in the end, this quarter was hardly squeaky clean. Aside from the Luon issue, the company noted certain misses from a styling perspective, higher expected landed costs in 2H due to factory/production issues, SG&A deleverage through 2H14 as LULU ramps up its East Coast distribution center, and difficulty in finding store locations to facilitate Hong Kong expansion.


We still think that LULU is one of the few iron-clad brands in retail that can put up 20%+ organic top-line growth on a consistent basis for the next 3-5 years (the others are RH, FNP, UA and KORS). But unlike these other brands, we think that LULU has risk to the downside in its mid-20s margin as the company spends more to facilitate its growth. If we compare it to UnderArmour (or FNP or RH), for example, we see that UA has only an 11% margin, and even it is stepping up spending on the margin to maintain top line growth. We think that LULU will maintain a significant premium to UA, NKE, RH and FNP. But in doing so we still think that the risk is to the 20% range as margins (and even high teens) look to find a final resting place.


This still nets us a respectable 20%-ish EPS growth rate by any stretch (25% top line growth less 500bp due to margin erosion). But with the stock trading at 33x earnings (per the after-hours sell-off) we find it really tough to get excited about on the long side.

CALL AT 10:00am; What's Next For Europe?

CALL AT 10:00am; What's Next For Europe? - whereseuropeDial 06.11.13


We will be hosting a conference call TODAY, June 11th at 10:00am EDT titled "Where Does Europe Go From Here?"




Highlight the best investment opportunities in Europe and assess the overall economy of the region.  




  • Contextualizing the fundamental and structural headwinds in the region
  • The key actions of the ECB and its impact across markets
  • European bifurcation will remain, with clear winners and losers
  • Updates from the periphery and other risks investors should be aware of
  • Our investment outlook across asset classes over the intermediate term



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If you would like more details about this call please email .


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Client Talking Points


Overnight the Yen rips +1.6%, while the Weimar Nikkei falls -1.5%. We actually covered our Yen (vs USD) short yesterday on our signal as the risk range for USD/YEN just shifted to 96.05-99.55. It should be manageable now, but the meltdown in the rest of Asian Equities might not be. Check out all the red: Thailand -4.7%, Philippines -4.6%, Indonesia -4% as both the KOSPI and HangSeng remain below both our TRADE and TREND lines.


Hello Greece. It's been a while. Welcome back to the matrix. Greek stocks -3.6% this morning after getting smoked yesterday and now move swiftly back into full-blown crash mode (Athex -21% since May 17th). What does it mean? Illiquidity in global equity markets is for sale here, big time (especially in emerging markets).


Both illiquid securities designed to chase yield and Gold absolutely hate bond yields rising like this. This morning’s most important macro move is the 10yr ripping an overbought signal up at 2.26%. Above 2.41% starts driving the convexity function in my model (which leads to higher-levels of volatility). The next 15bps (up or down) really matters here.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Financials sector head Josh Steiner is the Street’s head bull on residential mortgage originator/servicer Nationstar, projecting $9 in earnings for the company in 2014.  This is well above the company’s own guidance range, which tops out at around $7.50.  NSM had a successful start to the year as it won servicing bids on substantial mortgage portfolios.  They also reported significant increases in their profit margins on those portfolios, and double-digit increases in their own originations.  Housing prices are ramping significantly higher, as Steiner predicted, as demand continues to exceed supply in both new and existing homes.  Steiner says this quality mortgage company could ride the crest of a sustained wave of sector improvement.


Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout.  An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona.  The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater.  Longer term, the objective is for BCN World to have six resorts.  The first property is scheduled to open for business in 2016.  


WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

Three for the Road


Central planners who think they can "smooth" economic gravity will lose control, in the end



“Success seems to be connected with action. Successful people keep moving. They make mistakes,but they don’t quit.”

- Conrad Hilton


$7 billion: The amount of money Citigroup stands to lose if the dollar gains against the yen, euro and currencies in emerging markets, which provide about half the firm’s profit. (Bloomberg)

Coaching Through Corrections

This note was originally published at 8am on May 28, 2013 for Hedgeye subscribers.

“A coach is someone who can give correction without causing resentment.”

-John Wooden


On weekends, I coach 4-6 year olds (hockey). During the week, I sometimes coach adults (macro). All the while, Mr. Market is always coaching me through something. I bear no resentment towards him. To the contrary, I quite enjoy it when he tells me what to do (signals).


With US stocks down for 4 of the last 5 days, there was another choice to be made on Friday – correction or crash? This wasn’t unlike many of the learning opportunities that Mr. Market has provided us in the last 6 months. Buying the correction has been the right choice.


The only thing that seems to be crashing this year is the idea that we are going to crash. The #EOW (end of the world) trade has been the worst place you could be long for the month of May. When you have #GrowthAccelerating, you don’t buy Yens, Gold, and Treasuries. Ask the Coach.


Back to the Global Macro Grind


After covering all but 4 short positions on red Friday morning, I posted a note titled “Oversold: SP500 Levels, Refreshed.” I also re-shorted the Yen at our immediate-term TRADE overbought line of 101.22.


These aren’t victory laps; they are timestamps – and I am 100% accountable to them. Two of the four short positions we have left are related to Japanese Policies to Inflate (short Yens and JGBs). The other two are short Russia (world’s 3rd worst stock market YTD, next to Peru and Cyprus) and short Emerging Markets (EEM) which do not like #StrongDollar (and are down YTD).


What if I didn’t listen to the Macro Coach? What if I just ignored my signals and went with “feel”? Been there, done that – many times over, in many arenas and markets – and, in general, it doesn’t work. For us what works is the combination of A) Risk Signals and B) Research Views – when we have both, we move.


Last week’s US Equity market risk wasn’t the economic fundamentals – it was Ben Bernanke. He tried his best to confuse economic gravity (#GrowthAccelerating) with his longstanding and dogmatic view that he needs a weaker US Dollar to achieve his goals. #wrong


He got that last week – the Dollar weakened and so did the US stock market in kind (they now have a very positive correlation, Ben). Bernanke’s jawboning arrested #StrongDollar momentarily (-0.65% on the week), and the SP500 corrected -1.2% from its all-time weekly closing high.


Back to the Research View - whether Bernanke wants to acknowledge it or not, last week’s US economic data was decisively bullish:

  1. New Home Sales for April ripped +8.8% sequentially (month-over-month) to 454,000
  2. US weekly Jobless Claims surprised on the downside (again) at 340,000 (-8.9% year-over-year)
  3. US Durable Goods #GrowthAccelerated +3.3% in April (versus March)

That’s why US Treasury Yields continued to back up (despite Bernanke trying to talk them down). The US 10yr Yield is up again this morning to 2.04% and has no intermediate-term TREND resistance to 2.41%. So Mr. Market is trying to coach @FederalReserve through this…


Whether Bernanke tells his boys to listen to the market’s message will be his legacy. His boss (President Obama) cares about his political legacy too. On the cover of The Economist this weekend is a picture of Barry looking a little confused alongside the titled “How To Save His Second Term.”


Coach says the best way to make Obama look good is via our #StrongDollar, Strong America strategy. It worked for Reagan and Clinton – and it can work for Obama too. If he doesn’t get it, Hillary will – this isn’t that complicated, folks.


Coaching you through corrections in Yens, Gold, and Treasuries starts with reminding you that these aren’t corrections – in 2 of 3, they are crashes – and for many Americans still choking on Bernanke Yield Chasing trade, the third may very well become his Waterloo.


Just to show you how horrendous being long no-growth “yield” is performing in the last month, here’s the score:

  1. Utilities (XLU) are already down -6.3% for the month of May alone!
  2. With Treasuries down (Treasury Yields up +38bps in the last month!), Financials (XLF) lead the SP500 at +5.5% for May to-date
  3. Low Yield Stocks (i.e. Growth Stocks) are up +6.7% in the last month and now +20.1% for 2013 YTD

Got that Messrs Bernanke and Obama?”


With the US Dollar +5.1% YTD and Commodities -3.7% YTD, Coach says get the US Dollar right and you’ll start to get America right. Freedom, Liberty, and Growth are the best paths to prosperity – not Dollar Debauchery, fear-mongering, and sketch balls at the IRS.


We can get you guys through this. Yes We Can. Embrace #StrongDollar, and be the change.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1341-1421, $101.48-103.94, $83.62-84.29, 101.21-103.66, 1.96-2.06%, 12.27-14.46, and 1642-1672, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Coaching Through Corrections - Chart of the Day


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