Going Long LULU Headed Into Earnings

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- As I have noted in previous TheStreet articles, I am not much of a fan of piling into a stock, on the long or short side, ahead of earnings.

This earnings season I have two long exceptions and one short exception. I have already discussed my bullish conviction toward Intel ( INTC).

In this article, I discuss one more stock I might consider making moves on prior to earnings.
Lululemon

>> Also see: Why I Am Buying Intel Into Earnings and Beyond

Lululemon ( LULU). LULU doesn't clock in for a while, reporting earnings on or around June 8. The other day I said this about LULU on TheStreet:
I bought LULU because I believe it's a well-run company that will continue to grow at a rapid clip. CEO Christine Day has the factors brick-and-mortar retailers absolutely must have to not only remain relevant, but survive:
  • A high-quality exclusive brand not available anywhere else
  • An affluent, very specific target customer willing to pay a premium for quality and social status
  • The ability to control limited inventory by not discounting.
  • After Lululemon's recent analyst and investor conference, Wall Street continues to jump on board. A Jeffries' analyst referred to Lululemon as a "brand without constraints," led by "dreamers and doers." This comes as the company plans to expand its brand beyond yoga apparel into areas such as surf and beachwear. And, as Jim Cramer pointed out late last month on TheStreet, LULU's inventory "problem" is really not much of a problem at all. In addition to what I have already discussed, three other points make me even more bullish on LULU. Consider the following tidbits from the company's most recent annual report:
    Our primary target customer is a sophisticated and educated woman who understands the importance of an active, healthy lifestyle. She is increasingly tasked with the dual responsibilities of career and family and is constantly challenged to balance her work, life and health. We believe she pursues exercise to achieve physical fitness and inner peace ...

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    Lululemon probably does not mention the other part of what really matters about its "target customer" because it's likely too presumptive for an SEC filing.

    Take it from me. I live near some big money in Santa Monica, Calif. I cannot walk the half-block to the grocery store without seeing at least one LULU customer sporting a piece of clothing with the locally ubiquitous Lululemon logo on it. I took a spinning class last night, staring at LULU logos for the entire grueling 45 minutes. Anything to get through a workout. In any event, the people who not only regularly buy items from LULU, but have forged a connection with the brand are not the types of folks impacted by economic downturns. Lululemon lists this as a potential obstacle in the risk factors section of the same annual report because it has to. It's almost meaningless boilerplate.

    The same cats I see riding $10,000 racing bicycles along the beach will extend Lululemon's reach as it expands not only to new areas, but continues to tap new demographics, including men and children. Speaking of expansion...
    Expand Beyond North America. As of January 29, 2012, we operated 18 corporate-owned stores and four showrooms in Australia, one corporate-owned store and two showrooms in New Zealand, and one corporate-owned showroom in Hong Kong. We plan to open approximately five lululemon stores in fiscal 2012 in Australia and New Zealand. Over time, we intend to expand on our own or pursue additional joint venture opportunities in other Asian and European markets ...

    In contrast to companies who grew too quickly (see, for example Webvan in 2000 and Netflix ( NFLX) in 2011), Lululemon takes an aggressive yet measured approach to international expansion. It needs to cement its dominance in North America first, where it expects to turn the keys on up to 32 stores in FY 2012.
    Our Chief Executive Officer, Ms. Day, whose experience includes 20 years at Starbucks Corporation, most recently serving as President of Asia Pacific Group of Starbucks International from 2004 to 2007, joined us in January 2008. Ms. Day has assembled a management team with a complementary mix of retail, design, operations, product sourcing, marketing and information technology experience from leading apparel and retail companies such as Abercrombie & Fitch Co., The Gap, Inc., Nike, Inc. and Speedo International Limited. We believe our management team is well positioned to execute the long-term growth strategy for our business.

    I have a new CEO test I am experimenting with. Once refined, it might end up being one of the things I use on my checklist for prospective long-term investments. Would the CEO or other top-level executive look out of place in a coffeehouse talking life and business with Steve Jobs? That's part of what makes me long Pandora ( P) and not long Sirius XM ( SIRI), for example.

    Day and her team at LULU come from companies that, at one time or another, innovated. She, like Jobs, is an innovator who obviously acts as if she runs in a space larger than retail. And she does. Her sophisticated and holistic view of selling quality products to actual living, breathing, not brain-dead human beings places her firmly in the second tier that stacks up by Jobs. This quality would certainly make her worthy of Jobs' time.

    At the moment, I am long LULU calls with a June expiration. I have a small position in the stock, which I plan to add to. As much as I love seeing leaders like LULU perform well on down days for the broader market, I wish there was more weakness today, as I would love to buy more shares (and calls) with the stock closer to 70 than 75. That said, as a long-term buy, I am not sure entry price matters much given the potential upside in one of the last bastions of relevant retail.

    At the time of publication, the author was long INTC, LULU, P and short NFLX via put options.

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