At first I thought to myself... these numbers don't count. They are for the most part, pre-Covid-19. Lululemon Athletica's (LULU) fiscal fourth quarter ended on February 2nd. I thought that this discounts the past performance, and the firm was unable to provide forward guidance, which is certainly understandable. The I looked at a few other metrics. The composition of sales. The balance sheet. I remembered something a friend in Italy mentioned the other day about consecutive days spent in sweatpants. I decided to take another look. After all, this name is a past Sarge fave, and has been good to me. I owe the company that much.
The Quarter Reported
For that fiscal second quarter, LULU reported EPS of $2.28, which did beat expectations. This came on revenue of $1.4 billion, up 19.7% year over year, and also a beat. Part of the story of why there might be a reason to be in this name is told in the comp sales. Total comp sales were up 20%. The firm drives 88% of its revenue in North America. North America is pretty much on lock-down. The firm had originally set a date of April 5th to reopen stores in both North America and Europe. That date at this point, seems unlikely. That's a reason to sell. However, when broken down, comp store sales only increased 9%, while direct to consumer sales soared 41%, which is obviously the way most consumer not only prefer to but must shop at this point.
In terms of execution, margins were good. Operating margin improved to 29.8% as operating income increased 26% to $416.5 million. Gross margin increased as well, to 58%. Though guidance can not be provided, the firm did say that except for one location, all stores in mainland China were now open for business.
Lululemon Athletica has a solid balance sheet that includes a cash position of $1.1 billion, and absolutely no long-term debt. A number of analysts have opined on the name. I tried to cherry pick the ones that I consider to be upper echelon members of that community. In reaction to the numbers, on Friday morning, Oppenheimer's Brian Nagel maintained his "Buy" rating. Nagel does not have a price target. Citigroup's Paul Lejuez also a "Buy" rating, and with a price target of $230. It should be noted that ahead of this earnings report, Morgan Kimberly Greenberger, who I have a ton of confidence in, rated LULU at a "Hold", which was a reiteration. Greenberger price target is just $148.
My thoughts. I like LULU. I think the firm is very well run. I think the firm is structured to survive well in a tough environment. Is "survive well" a good enough reason to allocate capital? Not amid this action. We are about an hour into what feels like a "risk-off" Friday. There could be reason for a positive algorithmic reaction should the House of Representatives pass the fiscal support package, but then again, this may be priced in. That leaves end of month re-balancing as the next positive catalyst. In between here and there, a lot of news could break, and there is at least a pretty good chance that some of that news will be negative.
Right now, this is a tough name to slap down $193 a share. I do not like the way that the name behaved as it approached the 200 day SMA over recent days. That said, the options market for this name is expensive given the volatility. A trader who did pay $193 for 100 shares could write one May 15th $200 call for about $18. That's an idea. Net basis of $175. Could get called away in mid-May at $200 for a net profit of 14.3%. Again... just an idea.