Lululemon (Nasdaq: LULU) announced quarterly results a couple business days ago and you can see the market reaction as follows:
They made 39 cents per share in the quarter (which was positively affected by a tax adjustment regarding their transfer pricing) but that isn’t exactly the story. Even when you annualize their earnings or take the next year’s analyst estimates of $2.07/share, you still have a stock that is very pricy for a retail clothing company.
However, it brings me to one of my fundamental rules of trading, mainly: valuation is a necessary, but not sufficient criterion for shorting the stock. As tempting as it seems, you will need to know the psychological catalyst that will bring the company’s stock down or in disrepute before shorting. If valuation is the only reason, your short sale will likely lose money.
Short selling is a very difficult business because your position size concentrates as it moves against you, and decreases as it moves into your favour. Managing your position size and dictating your risk in explicit terms before-hand are two ways to mitigate this negative mathematical aspect of short selling.
I do not have any positions in LULU and do not intend to establish any either. This observation is purely for spectator sport purposes.
LULU strikes me as a very similar stock to RIMM 10 years ago, when it started to become death to shorts. It’ll be interesting to see if the same “death spiral” scenario will be in the cards for LULU eventually, or if they can continue to innovate ahead of the curve. A huge parallel is the importance of “fashion” in both industries. Is Lululemon the RIM or the Apple in this situation, or neither?
The best two sources to ask this question to are likely women that are either existing or previous shoppers at Lulu, and secondly the employees of the company – i.e. if they are still as rabidly motivated to work for Lulu as they were (at least from the couple people that I knew working there – it felt like brainwashing that was similar in tone to the impact Steve Jobs had on his employees). I was too polite to tell them that.