Lululemon (NASDAQ:LULU) reported earnings today (Dec.1st). Although the company was able to beat the earnings estimates by 2 cents, the stock still tumbled 16% immediately at the open. The issue was that Lululemon was not able to meet their sales figures, and management lowered their previously stated guidance for the fourth quarter. While the stock did recover quite a bit from its low opening, there are still many questions regarding where it will go from here.
The factors that brought the stock down so much are what I detailed in my November 21st article regarding shorting Lululemon which can be found here.
Where to from here?
At the end of the trading day on December 1st, Lululemon was trading at $47.17 a share. This is down 5% from the previous day. That is a far cry from the 16% it was down at the beginning of trading today. That recovery is something that LULU backers have said signals that the stock is strong. I say different. The recovery in today's trading is nothing more than buyers trying to get in on what they think is a bargain. Those who bought on the overreaction at the beginning of the day could have made an 11% profit when they sold at the end of the day. There is certainly nothing wrong with that. However, the stock will continue to trade lower in my opinion. I first recommended shorting LULU on Nov. 21st at $49 a share. It is down from that price, but not enough to cover. I believe that anywhere in the $38-$40 price range is a good place to cover shorts on LULU.
Why this conclusion?
Nothing has changed since my Nov. 21st post. In fact, things have only gotten worse for LULU, and now others are starting to catch on as well. The lowered guidance is the thing that will drive this stock down the most. This is the catalyst that I pointed to in the previous article as a potential reason why LULU might drop. Now that sellers overreacted and buyers picked up the shares to help LULU to recover a bit a new story will emerge. The buyers are not likely to be enthused about picking up LULU shares after such an underwhelming earnings report. However, there may be more than a few stock holders who look to sell when they consider what the lowered guidance means for the high PE Lululemon.
Lululemon is a high beta stock and will likely swing back and forth for a while before settling down lower than it is now. Anyone who shorted LULU on my recommendation on November 21st could have covered this morning and taken home a nice profit in that ten day time span. However, I do not believe that those who did not pull the trigger are going to lose out. In fact, in time I believe that they will end up scrapped up even more profits. Once again, I recommend covering LULU shorts anywhere in the $38-$40 range.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.