So, I wavered. Or, more specifically, the stock made me waver.
I am talking about the peripatetic style of the stock of Lululemon (LULU) , which is so hard to game even when you get the darned story right.
Last quarter, if you remember, Lulu botched the numbers and it fell from $66 to $50 in one session. I like Lulu and I had liked it for years, but I have been trying to pull back from stories I like, if that kind of reaction is possible. There are simply very few watchers and followers who can take that level of pain to get to some level of distant gain.
The reasons given for what amounted to a two-month shortfall had much more to deal with the wrong style and execution than I prefer. I would like to think a stock of a company that briefly slips up couldn't have that kind of negative move.
More important, I lost conviction thinking that there was something else at work, that the competitors had finally caught up and the real issue's something deeper. The ethos I liked so much, the idea that LULU was more than just four walls with merchandise, may have been fanciful, given the intense competition in the space.
Well, last night we discovered a couple of things. First, it was just execution. The company said the last month of the disappointing quarter was a good one, and there was strength coming into this quarter reported last night.
That turned out to be totally true.
Second, that strength accelerated as new styles, including a new bra, drove sales.
Third, the expansion worldwide continues apace, with supply chain issues that had also dogged the company under control and Chinese demand accelerating. The $1600 per square foot numbers out of Shanghai were breathtaking, and a further testimony to my initial belief that there's more to this company than just bricks and mortar.
You don't get more than 200 basis points expansion in margin, a need for more stores quickly because of worldwide demand, and 39% comps in some items of clothes, if things aren't smoking.
Which brings me back to my initial thought, my wavering on a story that I had stuck with through thick and thin. These numbers justified sticking with LULU.
But the violence of the stock seems wholly separate of the company. It's almost as if the stock acts like the company's a fad, something like fidget spinners, the faddish toy that drove a lot of Five Below's (FIVE) numbers last night.
But the business itself isn't a fad, and while it is not immune to fashion mistakes or competition, it's not going to make that many fashion errors, and the competition seems to have made inroads and then fallen behind as the year began.
Which begs the question: what do you pay for a $2.28 to $2.38 earnings stream from Lulu, given the volatility and the ferocity of the short sellers who don't believe? What kind of multiple can you put on a faster growing apparel company with fashion risk that is loved beyond most apparel businesses and has more control over its destiny, because it is not a wholesaler trapped in the body of the mall department store?
Do you pay 20x because of a repeat risk of failure? 30x because of the loved and transcendent nature of the company? 25x because it is better than most, but not immune?
Or do you just say "I ain't playing."?
At my old hedge fund, I would waffle over this one, for certain. If demanded, I would say 25x earnings, for the reasons above. Sure enough, that gets you to $57, pretty much where it is in pre-market trading, showing that others embrace this analysis.
But on the trading desk? I am tempted to say, I ain't playing. You see the risk of being wrong turned out to be better than the reward of being right.
So, a lightning round query: $57. A demand that I own it for, say, Action Alerts PLUS, my charitable trust? No can do. Too crazy!