LULU - Lululemon - Company Description

Lululemon Athletica inc., an athletic apparel company, together with its subsidiaries, designs, distributes, and retails athletic apparel and accessories for women, men, and female youth. It operates through two segments, Company-Operated Stores and Direct To Consumer. The company offers pants, shorts, tops, and jackets for healthy lifestyle and athletic activities, such as yoga and running; other sweaty pursuits; and athletic wear for female youth. It also provides fitness-related accessories, including bags, socks, underwear, yoga mats, and water bottles. The company sells its products through a chain of company-operated stores; outlets and warehouse sales; a network of wholesale accounts, such as yoga studios, health clubs, and fitness centers; license and supply arrangements; and showrooms, as well as directly to consumer through lululemon.com and ivivva.com e-commerce sites. As of January 29, 2017, it operated 406 company-operated stores under the lululemon and ivivva brands in the United States, Canada, Australia, the United Kingdom, New Zealand, China, Hong Kong, Singapore, South Korea, Germany, Puerto Rico, and Switzerland. Company description from FinViz.com. LULU was crushed after earnings in a textbook knee jerk reaction. The company reported earnings of $1.00 that rose 17.6% but missed estimates for $1.01. Revenue of $789.9 million rose 12% and beat estimates for $785 million. Same store sales rose 6% while online comps rose 12% to $164.3 million. Clearly there is nothing wrong with those numbers.

The major crash in the stock came on weak guidance for Q1. They noted that January sales had been weak but the CEO said they immediately changed everything from inventory, colors and marketing and they saw "drastic changes" in sales almost immediately. The company guided to revenue in the $510-$515 million range with a 50 basis point improvement in gross margins. The stinky number was the earnings guidance at 25-27 cents and analysts were expecting 39 cents. Year over year, that guidance is only 3 cents below Q1-2016 levels.

For the full year they see revenue of $2.55-$2.60 billion and low single digit sales comps. LULU is debt free and very profitable even if they have a slightly slower Q1.

Mizuho Securities said it was time to make lemonade out of Lululemon. The analyst said forecasting low single digit Q1 comps compared to 5% in Q1-2016. The difference is not material given their revenue increases over the last 12 months. There are signs of a sharp increase in sales after they launched the "fast and free" collection in January. Long-term growth remains intact.

After the earnings five brokers cut their rating to neutral. Not to sell but to neutral so they can see how the quarter plays out. Telsey Advisory Group, a noted retail house, reiterated their outperform rating but cut the price target from $92 to $78. Shares closed Friday at $52.

This is a very profitable retailer growing revenue at 12% and earnings at 18% when nearly every other retailer is closing stores and losing money.

Earnings June 28th.

I am recommending we buy the dip. There may be some additional weakness in the short term but the drop stopped right on long-term support.

Buy Jan $55 call, currently $5.50, no initial stop loss until we see how next week plays out.