Lululemon Athletica Inc. (LULU.O), still recovering from an embarrassing recall of see-through yoga pants, is seeing its share price decline on lower earnings guidance for the year. We unravel the threads of the Lululemon story.
Analysts were hoping to get more from the earnings call in terms of the new CEO search, but the current CEO, Christine Day, only said the company’s search committee is in discussion with several candidates. More information might have supported the stock performance, despite its trimmed outlook.
Still, analysts believe that the stock remains an attractive long-term investment due to its global expansion and brand loyalty. What’s more, when looking at the company’s credit ratios, the company’s profitability seems to be in good shape.
SmartRatios Credit Risk Implied Rating AA+
LULU scores in the top decile in the SmartRatios Credit Risk Model. This model is predictive of a company’s credit distress and is designed to warn investors of credit-related risk. The company’s overall SRCR score shows an impressive 100 on a 1-100 scale (Exhibit 1).
This indicates a lower level of credit risk than most other North American stocks. The model combines accounting financial ratio analysis from reported financial statements and forward looking analyst estimates via StarMine’s SmartEstimate. The four of five components that are of most impressive are Coverage (100 out of 100), Liquidity (99 out of 100), Leverage (94 out of 100), and Profitability (91 out of 100). Those scores might well put a potential investor at ease.
Heavily Shorted Stock
Still, the stock has been heavily shorted. The StarMine’s Short Interest model gives Lulu a score of 6 on a 1-100 scale. Moreover, the relatively higher proportion of short sales means that the odds of a short squeeze driving the share price higher are possible; the StarMine Short Squeeze indicator stands at 73. This unique measure combines analysis of the number of short positions and indicators of volatility. Those stocks with a rating closer to the top level of 100 are most likely to experience such a squeeze from a big upward movement as short sellers scramble to get out of their bearish positions. In LULU’s case, investors are not shorting for hedging purposes, but because they believe the stock is overvalued.
Share price picture
This goes hand in hand with the StarMine Intrinsic Valuation Model, where LULU scores in the bottom decile, earning a score of 7 on a scale of 1 to 100. Currently, analysts believe the company’s earnings will grow from the $1.85 a share it reported last year to $2.55 per share by 2015. But StarMine research has found analysts tend to be over optimistic when it comes to forecasting earnings, and the further forward in time those forecasts are, the greater that optimism bias. Currently, the stock trades at $69, but StarMine suggests it should trade closer to $36, when removing the optimism bias and adjusting the company’s growth rate.
For more information, watch this video
Receive stories like this to your inbox as they are published. Subscribe here and follow us @Alpha_Now on Twitter. If you are looking to access our data or analytics, register for a free trial.
