Justin Isaacs

Justin Isaacs
Contributor since: 2011
Apparently LULU was priced for perfection... Off about ~30% since I wrote this and ~45% from the high. In the end, valuation does matter, even if LULU-heads think it doesn't.

I realize you never have a loss or profit until you sell. If you sold out at the top congrats, but does anyone who said this was a $100 stock still think that?

Won't be surprised to hear crickets...
Sell it if you have a long position and allocate elsewhere.
If you don't own it, avoid going long.
I'm not picking my spot, I think 12 months is a good reference point.
I never said its going to plummet.
It did move into the 70's and even hit 80... So what? What if it never gets back there again? It sounds like you made a great trade on it, but not everyone is as lucky as you.
I agree with you that traditional methods are best, and shorting is pure speculation.
I wasn't wrong about LULU falling, because I never suggested it was headed for disaster, I just recommended avoiding going long as you could find better valuations. As per my above comment, I think it was a good call.
Forget the P/E ratio for a minute and please tell me this: what numbers are you anticipating over the next 5 years? 40% sales growth for each year at historical margins? 45%? Are you accepting analysts expectations or do you have your own? Enlighten me...
It's been almost 12 months since I advised against going long LULU (I never actually suggested shorting it).
During that period, the stock has returned about 3% ($67 today vs. $65 at the time of the article). Over that same period the S&P500 has returned almost 10%. In that context, I would argue that my call to avoid LULU is looking pretty decent right now.
To answer your question though, my view has not changed on LULU, and it's not about simply looking at a high P/E ratio and drawing conclusions.
Anyways, a good discussion nonetheless. All the best in 2013!
Thanks for your comments. The 52-week trading range for CHL is $48.5 - $59.7 so a pullback to $48 is not beyond the realm of possibilities.
However, you are right to point out that this is probably not likely in the near term. As I mentioned in the article though, a good strategy to use in this situation is to write put options at $47.50 while you wait for a pullback to a better price point.
I wrote a bullish article on GLW about a month ago if anyone is interested:
No need to get emotional over this stock. In the article I said I wouldn't go long Lulu, but I stopped short, pardon the pun, of saying I would short it.
Also, these things tend to take time. If on Jan 1, 2000, I told you the NASDAQ was overvalued, you could have came back on April 1, 2000, and said to me, "I told you it wasn't."
So, let's just wait and see what happens over the next 12-18 months.
The 15% discount rate is a conservative number he is using to discount.
The margin of safety is simply the difference between his valuation of GLW and the market's (which he wants to be at least 50% as to allow for any errors).
You are suggesting that LULU has a competitive advantage in quality and style. My point is that there is no patent or secret formula to making the products LULU does. I agree with you that there is little competition in terms of quality at the moment, but that can change quickly – and will. There is nothing to stop any other retailer, like GAP, from selling identical products. Regarding LULU’s style advantage, you back up your argument by stating:
And they make the gear smartly, thumb holes for thumbs so sleeves do not pull up during running, plastic pieces on draw strings for easy access (hard to describe until you actually see it).
The above mentioned qualities are certainly not unique to LULU products. You also say, “Those cool Lululemon bags are a huge hit, and everyone has them.” I live in Vancouver, the hotbed of LULU, and I can assure you that not everyone has one.
With regards to your rebuttal on growth opportunities, it is difficult to even dignify your argument with a response. They will succeed in Japan because of their name and the fact that the Japanese like North American products in general? They have barely entered the US market; therefore, they will have tremendous success there? There is growth potential in Europe, Asia and South America, but the important thing to look at is if their products will sell in those markets. I say no (as per the article above), regardless of their name.
Finally, you hardly make any reference to valuation other then saying it could go as high as $80 by the summer. It could, as I cannot predict the future, but what kind of numbers are you anticipating over the next 5 years to justify this high multiple? I think you alluded to it best – past performance does not necessarily provide any indication of future performance. Although every situation is unique, look at the story of Crocs as an example of how a companies' growth can hit a wall.
I have been in a LULU store countless times as there is one located 5 minutes from where I live. In fact, I even purchased a pair of overpriced pants to see what all the fuss was about.
I am not sure what you are getting at when you say culture... As I said, I have been in many different LULU stores many different times and cannot recall a culture, or distinctive shopping experience any different from any other retailer.
Interesting take on cost, but for me growth is the key metric for LULU. In regards to consumer tastes, I do not believe it is as easy as you make it seem to do your due diligence on a target market and act accordingly.
I see where you are coming from, however. You think of a North American company like Ford designing cars specifically suited for Europeans and selling those cars in Europe as opposed to ones designed for North Americans. The problem for LULU is that they are in a niche – It would be more like Hummer trying to sell their vehicles in France.
Their best chance in foreign markets is to expand their product mix, which I concede they have done, but it is still not to the extent where they can start selling their products to the Indians or Chinese. Also, as they expand the types of items they sell, they may lose their niche and will definitely start competing directly with the largest retail companies.
Sorry for being unclear. I am not trying to underplay the importance of brand equity. On the contrary, it is extremely important and a lack of it is a problem. I am saying that although it may appear customers are loyal to LULU’s products, they are in fact not. The popularity is with the type of clothing they sell which can easily be imitated by competitors (some of which have more recognizable brand names ie. Nike).
If a woman wants to purchase a new hoodie or pair of yoga pants, does she have to get it from LULU? Certainly not; however, at the moment they are the premier store for that type of apparel. This has the potential to change quickly as there is nothing to stop competitors from developing similar products for cheaper.
Great article. I believe that all the issues and concerns facing BBY are real, but overblown and do not justify the current valuation.
I wrote an article on the above point in Decemeber if anyone is interested:
LULU has cult followers just as RIMM had their cult followers is a better analogy. LULU is the only one selling these types of products right now...
It is only a matter of time before Gap, Nike, Under Armour, Abercrombie, or whomever figure out that yoga attire is popular and sell similar products for cheaper. Success results in increased competition.
I like their products, but if a competitor could offer me the same products at a significant discount it would be a no brainer.
Do you really think the Chinese and Indians are going to pay an outrageous amount of money for premium yoga pants?
I have to completely disagree with you on this point. Excuse the generalization, but consumers in those markets are much more price sensetive and LULUs growth there is limited.
Those companies you mentioned have exceptional brand names - a reputational asset. That is a resource of the firm which form the foundation for building a competitive advantage...
There are certainly other forms of competitive advantage, however. Wal-Mart is a retailer that outperforms K-mart because of their point-of-sale data system which allows the company to respond quickly to changes in demand. Zara is a clothing retailer that has an integrated vertical structure that reduces the amount of time between design and retail delivery to under 3 weeks (industry average is 6-9 months). The result is that Zara launches new styles on the market quicker than many of its competitors. Apple is where it is today because of the development of the Ipod. The product was differentiated enough from other MP3 players that customers were willing to pay a premium for it. This eventually led to "Ipod" replacing the "MP3 player" as a noun. There is undoubtedly more to competitive advantage than brand equity.
For Best Buy, their advantage over discount retailers like target, Wal-Mart and Costco is their in-store shopping experience and staff expertise. Their advantage over online stores is the fact that you can actually see, touch and smell the product you are going to purchase before you actually purchase it. I think you are correct that the advantage over discount retailers is small. The advantage over online retailers, however, is greater in my opinion (as per my article).
Circuit City did have a similar competitive advantage; however, the reasons for their failure are plenty - they had poor locations, terrible customer service (they hired cheaper staff), bad inventory management, a poor web presence, too slow into gaming, etc... Essentially, they had terrible management which made some questionable strategic decisions. To compare circuit city to Best Buy is an oversimplification in my opinion.
As to why your not buying the aforementioned items at Best Buy, I can't really comment. I can tell you my experience with similar products: I bought my laptop at Future Shop because I wanted to use it before I committed to a purchase. Same with my flat screen TV. I bought my Xbox at Best Buy because it was the first place that came to mind when I decided to go buy one. Not too mention it is the closest electronics store from where I live. I haven't bought a printer in awhile, but I would probably check out Best Buy among other stores like Staples. You see where I am going with this? Anecdotes don't mean much.
You make some really good points, however, and I appreciate your input. How would you classify Best Buy right now, a good company at a bad price or a bad company at a good price. Or, in your opinion is Best Buy correctly priced by the market?
I don't argue against the fact that online sales are increasing... They are and that's the reason why Best Buy is cheap. I argue that the threat is exaggerated. Like you mentioned above, Best Buy is already tapped into that growth with their website.
I think its a stretch to compare Boarders with Best Buy... Best Buy sells consumer electronics which encompasses a multitude of products, many of which require a customer experience before a purchase is made (ie. a home entertainment center). Boarders sold books, which in my opinion, do not require that at all. This is where Best Buy has a competitive advantage over online retailers that Boarders never had.
I love Best Buy the company too. They paid a lot for Five Star in China, but gained instant brand recognition there. Same thing with Future Shop in Canada. Best Buy Mobile is a great concept as well and does not require the traditional big store format as they are opening many smaller stand-alone stores. My point is, there's lots to like about this company.
If you want to find a bargain, there will of course be threats and issues associated with the company.
You're a pretty savy shopper 39413; however, I don't believe you represent the typical consumer.
For every clever person like yourself, there are many (and I happen to know some of them) technologically inept 50-something-year-olds who wouldn't feel comfortable buying online and would much rather deal with someone in person.
Of course, these are just anecdotes and the typical consumer is probably somewhere in the middle...
Regarding the savings in sales tax, Dethklok is correct in his assessment above. That loophole will be closed soon.
Yes I agree. Buying RIM for anything less than 'years', as you put it, is simply speculation.
Future growth potential is a huge factor and the main reason RIM was overpriced for so long. That being said, the companies' true value will be reflected in the stock price over the long term. This is true of every company and RIM is no exception.
Don't forget, investors who were primarily concerned with future growth potential (rather than actual cash flow) during the tech boom got burned. The same thing will happen to anyone who buys LINKD @ $80.