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Mar 30, 2017

S3 BLACKLIGHT: Most Shorts Failed to Turn Lululemon into Lemonade

Lululemon Athletica Inc.’s (LULU US) share price is down over 23% today after the company warned that 1st quarter sales would disappoint. LULU is projecting that earnings will fall in the $2.26 to $2.36 range while analysts had predicted $2.56/share. CEO Laurent Potdevin did not help his cause by admitting to weak e-commerce sales and a seasonal clothing line that “should have been bolder with color assortment” to bring more consumers into their brick and mortar stores. Lululemon’s Apple-esque following is being threatened by an uninspiring product line that is being besieged by athleisure powerhouses Nike, Adidas, and Under Armour and even newcomers such as Beyonce’s Ivy Park and Kate Hudson’s Fabletics.

Short sellers have been active in LULU for years, with short interest topping the $1 billion mark for the first time in May 2012. While short interest averaged $1.2 billion in both 2015 and 2016, short sellers have been covering sizeable chunks of their short positions starting in August 2016. By the end of 2016, short interest had fallen to $735 million, levels not seen since 2011. By March 29th, the day prior to LULU’s earnings announcement, short interest had fallen to $651 million.

LULU short interest traded in a range between $1.3 and $1.5 billion for just over a year, from July 2015 to early August 2016 as the stock price rose to $80.65; but surprisingly, as LULU’s price declined 12% in the second half of 2016 shorts began to cover their positions. Short sellers had an average position of $1.4 billion in the first half of 2016, but suffered a $447 million net of financing mark to market loss, or -33.0%. The second half of 2016 saw short interest decline to an average $1.1 billion position, but posted a gain of $156 million, or +14.5%.

Shorts continued to cover their positions in 2017, and the year to date average short position as of March 29th was down to $665 million. LULU’s stock price was up slightly by March 29th and short sellers lost $17.1 million, or down 2.6%.
From January 1st 2016 to March 29th 2017 LULU’s stock price was up 28.51% and short interest declined 52.14% during that time period.  Short sellers did not fare well, losing $308 million in net of financing mark to market P/L, or 27.82%.

On March 30th, with LULU’s stock price dropping 23.30%, short sellers made $151.1 million of net of financing mark to market P/L on a short position of $651 million in just one day.

If LULU short sellers spent less time in the downward facing dog position and kept short interest at their 2016-2017 average levels, they could have made back most of the losses they incurred in 2016.

Want deeper insight into the above analysis? Contact: 
Head of Research, S3 Partners
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