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LULU | In Search of TAIL

Takeaway: This qtr was a mess due to factors far beyond financials. LULU isn’t articulating a cogent plan – bc it probably doesn’t have one.

There’s one major reason why we think this LULU quarter was a huge let down -- and it’s not that inventories were up 23 days while Gross Margins missed by 200bps. Nor is it that LULU added $62mm in revenue year over year, but generated $1mm less in EBIT.  It’s the reality that this company does not know what it wants to be. Virtually every statement out of management on the call had to do with near-term tactical branding, marketing and product plans. All that is fine. It matters on some level – and definitely matters to small scale moves in the stock in the coming quarters. But that’s what we call TREND (in HedgeyeSpeak that translates to 2-3 quarters out – the near-term modeling horizon). This is where LULU lives, unfortunately.

 

But LULU needs a change of address. This is an extremely powerful brand in a solid, yet increasingly competitive, space. LULU needs to not only be a great brand, but a great company. Then and only then will it be a great stock. We think management is coasting on the power of the brand, by tweaking a legacy operating plan, blindly opening stores, and hoping that nothing else goes wrong. Hope, however, is not a profitable growth process.

 

LULU needs to live in the TAIL (which we define as 1-3 years). What we need for real wealth creation with this stock is for a clear, concise strategy that insiders rally around and are paid handsomely to implement. People need to look to $4.00 in earnings power, and believe in it. It’s that same strategy that would result in its CEO standing up and saying things that will make Nike, UnderArmour and Athleta quake in their boots (which used to be the case) – not that they are using ‘Sports Psychology on the Pant wall’.  Unfortunately, we truly think that LULU does not have a proactive process to grow its business.

 

Does The Company Have A Long Term Plan?

Somebody, please, ask virtually anyone in the company if they know their market share in stores and online within an hour’s drive of each store. [Note: our math shows it ranges from 2.5% (Long Island) to 26.7% (Burlington Vt) -- ping us if you want the data]. We don’t think they’ll tell you – because they probably don’t know.

 

How can a CEO stand up and give credible growth and profitability targets without knowing these basic building blocks?  How can they articulate why they don’t have a wholesale model – something that could be a home run for LULU (i.e. sell where the consumer shops)?  Even the CFO, who we have/had high hopes for, hasn’t created his own identity with the Street – as he’s following the same script of his predecessor who was pushed out.

 

All we get from the company as it relates to strategic initiatives are 1) Brand, 2) Community, 3) Innovation, and 4) Guest Experience.  The only quantified metric is that LULU will return to a 55% gross margin – something that we don’t think is realistic without meaningful backing by the balance sheet (i.e. more capex to boost profitability). But more importantly, the market is highly unlikely to pay for a passive goal to return to peak profitability when LULU is in a different stage of its growth cycle.

 

This is a great Brand, for the time being. We really want to get behind this story due to the potential that can be unlocked. But without the backing of a great company – we think this stock is going anywhere but up. We’re glad we pulled the plug in March.

 

LULU | In Search of TAIL - SIGMA LULU


REPLAY | Healthcare Q&A | #ACATaper, Jobs Report & Top Stock Ideas

Takeaway: Join us at 12:00PM for a live presentation on #ACATaper, the most recent Jobs Report, updates on our Top Ideas & an anonymous Q&A session.

Watch the replay

 

Our healthcare team presented on #ACATaper, the most recent Jobs Report and updates on our Top Ideas. As always, our analysts Tom Tobin and Andrew Freedman answered questions from viewers live.


INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES

Takeaway: Claims remain steady but the cycle grows longer in the tooth by the week.

Below is the breakdown of this morning's labor data from Joshua Steiner and the Hedgeye Financials team. If you would like to setup a call with Josh or Jonathan or trial their research, please contact 

 

3, 2, 1 ... Countdown

Claims remain on a countdown ...  We're now 19 months into the sub-330k environment. For reference, the last three cycles saw claims stay below 330k for 24, 45 and 31 months, respectively before the cycle gave way to recession. The average of those three cycles is 33 months. This implies ~14mos of track to the average of the last three cycles. Obviously, this is simply a reference point and the duration could more closely resemble that of the late 1980s (24mos), which would imply ~5mos of track remaining, or that of the late 1990s (45mos) implying ~26mos of track. 

 

One thing that's more certain and more imminent is the re-convergence toward zero in the rate of change Y/Y. This week that rate of change compressed to -6.6%, down from -9.1% in the prior week. We're finally lapping the floor in claims and within a month the Y/Y rate of change will be ~0%. From that point on, flagging early stage deterioration in the labor market will be a function of noticing any persistent and/or trending rise in Y/Y claims activity.

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Updated LT Recession Chart

 

 

The Data

Prior to revision, initial jobless claims fell 7k to 275k from 282k WoW, as the prior week's number was revised down by -1k to 281k. The headline (unrevised) number shows claims were lower by 6k WoW.

 

Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 0.5k WoW to 275.75k. The 4-week rolling average of NSA claims, another way of evaluating the data, was -6.6% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -9.1%.

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Claims2 normal  4

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Claims3 normal  4

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Claims4 normal  4

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Claims5 normal  4

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Claims6 normal  4

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Claims7 normal  4

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


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INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES

Takeaway: Claims remain steady but the cycle grows longer in the tooth by the week.

3, 2, 1 ... Countdown

Claims remain on a countdown ...  We're now 19 months into the sub-330k environment. For reference, the last three cycles saw claims stay below 330k for 24, 45 and 31 months, respectively before the cycle gave way to recession. The average of those three cycles is 33 months. This implies ~14mos of track to the average of the last three cycles. Obviously, this is simply a reference point and the duration could more closely resemble that of the late 1980s (24mos), which would imply ~5mos of track remaining, or that of the late 1990s (45mos) implying ~26mos of track. 

 

One thing that's more certain and more imminent is the re-convergence toward zero in the rate of change Y/Y. This week that rate of change compressed to -6.6%, down from -9.1% in the prior week. We're finally lapping the floor in claims and within a month the Y/Y rate of change will be ~0%. From that point on, flagging early stage deterioration in the labor market will be a function of noticing any persistent and/or trending rise in Y/Y claims activity.

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Updated LT Recession Chart

 

 

The Data

Prior to revision, initial jobless claims fell 7k to 275k from 282k WoW, as the prior week's number was revised down by -1k to 281k. The headline (unrevised) number shows claims were lower by 6k WoW.

 

Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 0.5k WoW to 275.75k. The 4-week rolling average of NSA claims, another way of evaluating the data, was -6.6% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -9.1%

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Claims2

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Claims3

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Claims4

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Claims5

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Claims6

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Claims7

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Claims8

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Claims9

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Claims10

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Claims11

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Claims19

 

Yield Spreads

The 2-10 spread fell -2 basis points WoW to 146 bps. 3Q15TD, the 2-10 spread is averaging 155 bps, which is lower by -3 bps relative to 2Q15.

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Claims15

 

INITIAL JOBLESS CLAIMS | LATE CYCLE IS AS LATE CYCLE DOES - Claims16

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

 


 


Keith's Daily Trading Ranges [Unlocked]

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Keith's Daily Trading Ranges [Unlocked] - Slide1

BULLISH TRENDS

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BEARISH TRENDS

Keith's Daily Trading Ranges [Unlocked] - 5

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KATE | Why KATE’s 8K Matters

Takeaway: KATE gave additional info to stem neat-term modeling volatility. But it’s what they didn’t say that’s probably more important.

The company filed an 8K in conjunction with its presentation today. A couple quick thoughts…

1) No change in guidance. It’s pretty safe to say that if business has been trending down, or was negative in any way, shape, or form, then KATE would have been obligated to disclose that in this 8K. Given how the stock has been trading, this is critical.

 

2) The company gave additional information related to store count and square footage in the US vs. Int’l. This might sound like a ‘who cares’ event, but given the poor level of disclosure at KATE, it is a step in the right direction.

 

3) Similarly, the company provided new information as it relates to the size of Jack, and Saturday, as well as the top line impact of its efforts to improve Quality of Sale.  Does any of this allow us to build a more accurate 2017 model for units, productivity or margins? No, but it offers up some clarity for people who are scratching their heads wondering why the company is beating on comp, and yet missing on the top line. It won’t matter anymore after the 4Q report. But should stem some of the volatility in results until then.

 

No Change to Our Thesis

We Still think KATE’s top line will double and margins will go from 6.6% last year to the high teens in three years’ time. All in, we’re looking at better than $2.50 in earnings for a stock that can’t seem to stay above $20. The CAGR needed to get to $2.50-$3.00 is well north of 50%, and yet the stock is trading at a high teens multiple on next year’s $1.07. This is a company that hasn’t meaningfully turned a profit since 2008, and once people get visibility into 2016, we think that investor sentiment around its growth and profitability will turn up substantially. This is a name that could, and should double by the end of next year. KATE remains one of our top picks in retail.

 

KATE | Why KATE’s 8K Matters - kate financials

 


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