Literally everything has gone right for Canadian yoga-ware maker Lululemon (NASDAQ:LULU) since the company started in 2004. Since going public the stock is up an amazing 800% that escapes the ken of the testosterone-dominated Wall St. analyst and momentum trader set. So, when there was finally a chink exposed in Lululemon’s high-tech fabric armor the wolves pounced and the stock has been brutalized since reporting their earnings Thursday morning, dropping more than 10% before recovering slightly. For a review of the actual results go here.
The nuts and bolts of this earnings report are eerily similar to that of Baidu’s (NASDAQ”BIDU) last month. The market expects companies like this to outperform and justify their very rich multiple. The first time they do not perform up to unsustainable expectations of the momentum jockeys, the stock is sold brutally with the shorts having piled on in droves and the momentum players heading for the hills with their short-term gains intact. Short interest in the stock is a staggering 10.6% The main worry for investors at this point is the dangerous rise in Lulu’s inventory coupled with a meltdown of the U.S. economy because of a disintegration of the European Union.
I give both dramatic events a low order of probability in the near or medium term as the ECB and the Fed are not out of policy tools to paper the whole ponzi scheme back together for another 12-24 months. In which case a strong brand that markets to women the way women network amongst themselves is going to perform just fine in that highly liquified environment. The same people who made Lululemon a success to this point will still be the recipients of central bank largesse. Being short a clothing company with such strong growth and sales per square foot that rivals jewelry stores and Apple (NASDAQ:AAPL) is a recipe for going broke.
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