Lululemon Is Oversold and a Value Buy Ahead of Earnings
NEW YORK (TheStreet) -- Heavily shorted stocks in decline typically have few options available. Declining revenue and income frequently means the only option available to management is to weather the storm and hope it passes. I love finding trending "it" fashion stocks that will crash the moment fickle and ever-changing tastes move on to the next thing.
I have a pair of Crocks
I love shorting stocks making new 52-week lows. They almost always continue lower and it's a profitable strategy.
But there's no way I would short Lululemon
Since earnings is just around the corner, let's first take a look at what Wall Street is expecting, and then I'll explain in charts why you want to buy Lululemon.
CEO Laurent Potdevin is anticipated to report 32 cents a share in this year's fiscal first-quarter earnings before the market opens on June 12. That would be a repeat performance of the corresponding quarter last year, and part of the stock's problem.
I think Lululemon will beat and report at least 34 cents per share, but lack of per share growth is the primary reason the stock isn't performing well. Fortunately, Lululemon has a relatively easy solution at its disposal that will soon become apparent.
The company also guided shareholders to expect gross margins between 50% and 51%, down from 53%, and that's the other primary concern. The Street's Herb Greenberg explains why margins matter in his fantastic piece on Michael Kors
There's no way to sugarcoat or get around it: Luluemon needs to maintain margins or investor concern over pricing power will remain. The company claims the cost of airfreight and currency exchange rates are squeezing margins.