Athletic apparel retailer Lululemon Athletica Inc. (NASDAQ:LULU)’s shares were decimated on the 4th as they closed a whopping 17.4% lower. The dip occurred after the firm reported its second quarter earnings report. Looking at the results, it’s unsurprising that the shares dropped as Lululemon Athletica Inc. (NASDAQ:LULU)’s $2.42 billion in revenue marked a 4% annual drop and missed analyst estimates of $2.46 billion. Similarly, the firm’s comparable sales dropped by 9% – a dip that is often a death knell for a retail stock. Cramer briefly discussed Lululemon Athletica Inc.’s earnings in a tweet:
“This self-destruction of LuluLemon intrigues me as a case study of mismanagement. Deeper dive required..”
The revenue and the comparable same store sales weren’t the only metrics that pushed the bearish narrative. Lululemon Athletica Inc.’s Americas business, which represents 66.9% of its revenue, saw its comparable same store sales drop by 12% on the back of an 8% revenue drop. Similarly, US revenue dipped by 8% while Canada revenue dipped by 11%. A 4% growth in International revenue couldn’t make up for the dips and neither could the gross margin expansion, which was fuelled primarily through tariff refunds. Looking at the overall weakness, it’s no wonder that Cramer believes that Lululemon Athletica Inc.’s performance was a case of management errors instead of broader market or business concerns.
However, famed contrarian Michael Burry has a different view. He believes that Lululemon Athletica Inc.’s strong cash position and little long term debt lend it a strong balance sheet that’s primed to withstand stress. In fact, following the disastrous earnings, Burry commented that he might buy some stock if it fell below the $100 mark and called the firm a trickster. The famed investor went as far as to call Lululemon Athletica Inc. a “fat pitch” – or a severely discounted stock with optimized safety margins.
While the broader hedge fund reaction following the Q2 earnings can’t be determined, filings from the second quarter show that 51 out of 1,006 funds tracked by Insider Monkey had held a stake in Lululemon Athletica Inc.. This marked a dip over the 61 out of 1,022 funds in Q1. Notable exits included Arrowstreet Capital and Point72 Asset Management. In terms of valuation, the shares trade at a forward P/E ratio of 10.6 which is lower than peer Nike’s 22.22.
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