I’m taking LULU off our Best Idea Long list. Simply put, the call has worked, and I have to go too far out on the risk curve as it relates to modeling assumptions that would justify putting new money to work in this name at $155 – which is a full $100 above when we added it to our Best Idea list in October. Over the past year this Board has done everything right. It closed Ivivva, turned the men’s and international businesses from dilutive business drags into profitable business drivers, ousted a woefully underqualified CEO thereby closing the door on the Chip Wilson generation, hired one of the most eligible bachelor CEOs to come in and create a great business around a killer brand, and then just capped it off by comping 20% -- the best comp in retail this quarter.
From here, you need to start building a story around what the next management team will do in order to double the size of this business. The problem I have there is that the current team can’t do it – bc that team does not yet exist. The new CEO has a mandate from Glenn Murphy and the Board to build a new infrastructure and invest against initiatives to generate $5-$6 in EPS. But that’s 3+ years out under a best case scenario, and in the interim business will slow (mathematically, it has to from these levels) at a time when capex and SG&A are stepping up to build a new company. My tolerance for going through an investing cycle with a growth multiple of 28x EBITDA and 40x EPS is as thin as those see-through pants from yesteryear.
By no means am I making a bear case here. I don’t think I could construct a good one if I tried. I’d simply rather get involved again when I can have an edge around some form of outsized controversy – and today there is absolutely none. There’ll be a time and a place to get back involved as this story evolves and we see a real company built around one of the best brands of a generation. But I’d have zero intellectual and analytical integrity if I looked someone dead in the eye and said that buying LULU here is a BIG idea. That ship has sailed.
-- McGough