Stock Interest List Update

MW - reported 1Q09 earnings on 6/8. This earnings report provided a more interesting entry point for a short as the stock went up significantly on the day.

I understand the comparative store sales figure has improved across the Company’s formats, but at a huge sacrifice to margin. The total revenue is declining (even with the supportive tux business) and store count is completely stagnant. I’m not sure I see the 16x FY09 earnings multiple that one calculates by extrapolating the 1Q earnings beat to each of the quarters in FY09 (i.e. adding 48c to the consensus of 82c prior to the 1Q release).

The FCF looked great but almost all of it came from the YoY delta in Accounts Payable, which I would assume will reverse a bit and even out through the year. MW has not had such a 1Q benefit from rising AP in the last four 1Q’s. The only justification for today’s valuation is based on normalized margins and cash flow. But I don’t see these things returning to normal within the next year to two years - see what happened to Net Income in 1Q. As such, MW remains on the stock interest list.

LULU - Lululemon Athletica Inc. is a retailer of yoga related gear and accessories. One has the opportunity to short this after the short interest has come in following the rally in the shares.

The knock on this short will be that there are only 114 stores and plenty of room for expansion. Whereas that is true, revenue growth in 1Q09 (ended May 3rd) was only 6%, while is comparative store sales was negative 8%. Despite this it appears this niche provider is being valued as a growth stock while doing mid-single digit negative comps and seeing the income statement falling apart.

Gross margin percentage in 1Q09 amounted to 42.8% from 53.4% YoY. Operating margin fell to 12.1% from 15.5% YoY. Meanwhile EPS in the quarter declined by 25%.

My conservative DCF does not come close to justifying the multiple on this Company. I went to the local store over the weekend and it had five women in the shop. One guy was waiting for his significant other and not shopping. I was the only male browsing and I could not find anything for under $30 and while I admit the quality is excellent, anything I would have bought cost $98, and I could not justify it. This is not a significant sample, but on just next door Urban Outfitters was literally packed with shoppers.

LULU seems like the epitome of discretionary spend because it is so substitutable. As such, and in part because I still hold a negative view of the consumer in general in the near-term, I am adding LULU to the Short Interest List.

-2outof4