CONCLUSION: I can’t remember the last time I pulled the plug on a call 4 days before a print. But the risk profile on staying Short LULU is simply bad. I don’t like bad. I hate it, actually. The TAIL call is changing to the plus side, there’s optionality in $3+ EPS power under the current (horrible) team, and closer to $4 EPS post a shake-up that I think is increasingly likely in 6-9 months’ time. In #retail5.0, maybe 75 of the 300 tickers on my screen ‘have the right to survive’. Like it or not, LULU is DEFINITELY one of them. That’s likely to be apparent over the course of 2-3 quarters. We need a BIG miss this week to get in the way of a changing TAIL. Good luck banking on that…in fact my bias is to the upside. Looking for 15% EPS upside ($0.40 vs Street at $0.35). This is one of the top three highest-octane retail EPS seasons I’ve seen in 23 years. I’m definitely not being caught on the wrong side here when the research is pointing me the other way. If I’m wrong on the print and it sells off, I’m inclined to buy it all else equal (or even slightly un-equal).
Here’s one of 10 Callouts from Friday’s Hedgeye RetailDirect
Why the heck am I short LULU. Been more right than wrong on it in the past. It’s a survivor, outstanding brand, absolutely horrible management. A brand problem can’t be fixed in anything less than 5-years. A management problem can be fixed in the time it takes to get a press release through PR Newswire. Going through the TREND bridge over this weekend ahead of the print. Not pulling plug right now [ie as of Friday morning].
On the ‘absolutely horrible management’ point -- I’m not talking 'Kohl’s bad'. But on a ‘brand value per management quality scale’ I have a hard time finding anyone as horrible as LULU. I’d argue – quite strongly – that UnderArmour is better (and UA will likely have to tap capital markets after the stock falls another 40%). Like LULU, UA has a poor operating structure, but as least is run by people with passion. There’s much more granola than passion at LULU.
Likely to be a very different team by BTS ’18. I know this is out there already – I’ve been saying it for the past four months – but the LULU, RL, WFM trifecta is very real. You got Glenn Murphy – who’s pretty much the new Mike Ullman (Retail Grand Poo-Bah). He had skin in the game at WFM and got that deal done VERY quickly. Now he’s co-chairman at LULU. This is his new pet project. A deal very unlikely to get done here. If I was long, I wouldn’t want it to…a turnaround would arguably get shareholders paid more than a deal at a 30% premium. And yes, Stefan Larsson, who’s the ‘most eligible CEO bachelor’ in retail today (the guy is a visionary – AND knows how to execute on it). If you know me – which you prob do if you’re reading this – then you know I rarely tout one person that can change the fortune of a single company. Larsson was Glenn’s MVP at GPS, and yes, his yes, his non-compete from when Ralph fired him ends in April. I’ll make that bet comfortably on Larsson.
Maybe, possibly, could be, might, maybe happen…someday? (#no). To be clear, I won’t ever invest on the prospect that one person possibly might be offered a job, and then might possibly or probably (or not) accept it. But the reality is that LULU is a survivor, it has significant terminal value (when 30-40% of public retailers arguably do not), and another $2-$3bn in revenue as it executes on its Int’l strategy, and yes, tiers out another $1bn in a wholesale strategy in the US (higher ROI).
In the end, the number of ‘what ifs’ on the bullish side of the ledger outweigh those bearish side by about 3-to-1.
On this quarter, my bias is to the upside unless we see a merchandising/marketing gaffe on par with the disasterous 1Q print. To be clear, I don’t have an edge on the comp. I’m ok admitting that. But I can (and do) risk-manage around what the range of outcomes could be. In that context, for the first time in as long as I can remember, I’m pulling the plug on a position in advance of a print.
Brian McGough
(Here’s Daniel’s Modeling puts/takes. Note…Daniel is a veteran, but new to my team (and Hedgeye). He’s even better than Jeremy with the quarterly modeling. And Jeremy is better than me.
Modeling Callouts
- Consensus $567M +9.3%, SSS +4.2%, EPS $.35 GM +110bps, SG&A +21.5%
- Should beat by a nickel (15%) EPS guidance is $.33-.35 includes $.05 for digital acceleration.
- Revenue guidance is $565-570M w/ LSD-MSD% SSS
- GM moves +100bps in Q2
- SG&A leverage begins in Q4, but in Q2 expected to delever 350bps half of which is one-time.
Remember the diversion w tone vs performance on that last call. Results were horrible, and yet management was somewhat humble (oddly) – calling out their mistakes, and seemed borderline bullish headed into 2Q? The stock knows that given the rebound. But notable anyway.
- New menswear designer – jackets and outerwear in 2H, TAIL opportunities
- Sneakers in 2H. Likely to work w very low risk (still need to quantify).
- Expanding best performing stores by 50%. Large part is menswear. 12 last year, 15 this year
- Customer has been willing to pay for innovation, like the new bra (but won’t at LB – ie innovation shows up in pricing w function/aestetic…instead of just fashion).
- E-commerce has inflected
- Low to MSD% comp guide for Q2
GM: it will be interesting how the shares react as GM comparisons are much more difficult in the 2H. On a two and three year stacked basis the comparisons are positive in Q4. Product margins are up significantly and being offset by discretionary items.
Q2 estimate: I’m at $.40 (Street is at $0.05), but I think management is sandbagging guidance of SG&A deleverage of 350bps. I have to take most of management’s guidance on SG&A which is more controllable, but it can certainly be much lower.
Conclusion: Model-wise, I wouldn’t be short this. People likely missing upside to SSS (via ecommerce – good for LULU while everyone else decelerates), margin trends and sandbagging on benefit from ivivva (10% of store base closed – was losing $). Don’t be short upside from any two (maybe even one) of these factors in this tape.
Daniel Biolsi
