Hedgeye Co-Head of Financials Sector Research Jonathan Casteleyn is adding Legg Mason to Investing Ideas.
We will send out a full report shortly detailing our bullish case.
Takeaway: We pulled the plug on our LULU Bear call. Our work clearly shows that things are improving. If the qtr is weak, we may get outright bullish.
Conclusion: After being extremely bearish on LULU since the fall, we're changing our position on the name. While we are not outright bulls at this point -- and while we believe there are extreme challenges for LULU from here -- we do not think that the bear case carries meaningful merit. If the quarter is sloppy and the stock trades down, we may get outright bullish.
As background, we had been long-term bulls of LULU, but last fall turned bearish as LULU's well-publicized gaffes started to come about. Then we conducted a detailed consumer survey of 500 female Yoga shoppers (80% of whom were LULU customers) across appropriate demographic groups. That survey -- conducted three months ago -- told us to press our short, and it was right to suggest we do so.
But yesterday we released an update to our survey, which asks the same detailed questions (and then some) to the same demographic group. The punchline is that things are unquestionably getting better on the margin. We outline all of the reasons why, and then some, in our 52-page slide deck, the link to which is below. Also, if you care to listen to the accompanying presentation, that audio link is below as well.
One slide we'll highlight is #12, which shows the 'Brand recommendation factor' now versus when we first ran the survey at the beginning of the year. The question asks the extent to which consumers would recommend each of 18 brands to their friends. At the start of the year, LULU ranked embarrassingly low. But today, it is right in line with peers. There's definitely room for improvement. But things have gotten better on the margin, and that's what matters most to us.
By no means is the change in our opinion based on one simple question. But many of the questions that we asked -- especially those where we could compare today's results versus those from the start of the year, simply suggest that anyone playing on the short side for things to materially worsen from here has a pretty tough risk/reward on their hands.
Are their challenges? Sure. Athleta (GPS) is emerging as a major threat to LULU's business, and Nike is strengthening on the margin. Also, based on our results we think that there is a problem with perception of value for LULU's product, which suggests to us that the company will have to start a more meaningful discounting strategy.
In the end, we come out much higher on the top line over our 3-5 year modeling period, but we have margins going from 24.5% to just under 19% (see Exhibit below). While multiples rarely expand when margins are coming down, we think that with the stock having a 4-handle, better top line will probably win over margin degradation.
If the company gives weak guidance on the quarter, based on what we see we'd likely look to get more aggressive on the name.
HERE'S A LINK TO OUR FULL SURVEY AS WELL AS THE AUDIO PORTION OF THE PRESENTATION
MATERIALS: CLICK HERE
AUDIO REPLAY: CLICK HERE
This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.
Gold has shot up over 9% versus the DJIA, which is down over 1% year-to-date. Why? #InflationAccelerating.
Watch Hedgeye CEO Keith McCullough discuss the market and economic implications for investors of our top Q1 global macro theme.
Gold remains one of the best ways to be long of inflation slowing US growth.
In an effort to evaluate performance, we compare how the quarter measured up to previous management commentary and guidance
1H 2014 TRENDS
2014 ONBOARD YIELDS
Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.