What Hedge Funds Know About Lululemon’s Earnings Report That You Don't

This morning shares of Lululemon Athletica (LULU) are trading higher after ending a 6 month search to replace Christine Day at the helm. Early today the company announced Lauren Potdevin, former CEO of TOMS Shoes, will take over in January.

2013 has been a jumpy year for the yoga apparel retailer’s stock. The company got off to a rocky start in January but roared back in April after posting stronger than expected results for FQ4’13. Investors bought up shares of LULU throughout the quarter and the stock price surged to a yearly high of $82.50, but the climb was short lived. On June 11th the price plunged when CEO Christine Day shocked everybody by announcing her resignation after a March recall of Lululemon’s popular Luon black yoga pants.

The recall was issued due to concerns over quality control in manufacturing resulting in pants being made too sheer. Misguided comments from founder Chip Wilson claiming that the pants “just don’t actually work” for some women’s bodies added controversy and increased uncertainty about the brand’s future. It was announced this morning that with the executive change Chip WIlson will step down as chairman.

Christine Day’s loss was truly costly after an impressive 5 year tenure in charge. On the same day that Ms. Day announced her departure LULU beat Wall Street expectations on both EPS and revenue but it wasn’t enough to spare shareholders from a painful pullback in the wake of the announcement.

Since falling to a 52 week low of $59.60 on the news of Day’s resignation, Lululemon shares have bounced around and are sitting at $72 as of the time this article was written. The athletic retailer is expected to report FQ3 2014 earnings before the market opens on Thursday, December 12th. The information below is derived from data submitted to the Estimize platform by a set of Buy Side and Independent analyst contributors. You can share your own estimates as well by visiting www.estimize.com.

The current Wall Street consensus expectation is for LULU to report 41c EPS and $375.70M Revenue while the current Estimize consensus from 21 Buy Side and Independent contributing analysts is 44c EPS and $380.98M Revenue. Over the past 6 quarters Estimize was closer to forecasting the reported EPS 5 times and more accurate in forecasting revenue 4 times. The Estimize consensus is more accurate than Wall Street 69.5% of the time because it represents unbiased market expectations. By tapping into a wider distribution of contributors including hedge fund analysts, asset management firm analysts, industry experts, students, and non-professionals Estimize is better able to capture the true market outlook. The magnitude of the difference between the Wall Street and Estimize consensus numbers often identifies opportunities to take advantage of expectations that may not have been priced into the market. In this case, we’re seeing a larger differential between the Estimize and Wall Street numbers compared to previous quarters.

Over the past 4 months the Wall Street consensus trend for EPS has fallen from a high of 45c to 41c while Wall Street revenue expectations have also decreased from $390.08M to $375.7M. The Estimize EPS and Revenue consensus have similarly both fallen throughout the quarter with EPS going from 47c to 44c and Revenue dropping from $388.01M to $380.98M.

Throughout the previous 6 quarters, LULU has beaten the Wall Street consensus on EPS and Revenue all 6 times. Over the same time period LULU has been above the Estimize EPS consensus 4 times while being accurately predicted twice. The yoga company has also beaten the Estimize consensus for Revenue 5 .

The distribution of estimates published by analysts on Estimize range from 40c to 50c EPS and $373.00M to $391.70M Revenues. We’re seeing a narrower than normal distribution of estimates this quarter for LULU. The size of the distribution of estimates relative to previous quarters often signals whether or not the market is confident that it has priced in the expected earnings already. In this case it appears that market expectations are confident within a smaller band than usual. A narrower distribution signals the potential for less volatility post earnings, a wider vice versa.

The analyst with the highest estimate confidence rating this quarter is WallStreetBean who projects 45c EPS and $384.41M Revenue. In this case WallStreetBean who is ranked 21st overall among 3322 contributing analysts has expectations that are slightly more bullish than the Estimize consensus. Estimize confidence ratings are calculated through algorithms developed by our deep quantitative research which looks at correlations between analyst track records and tendencies as they relate to future accuracy.

Despite plenty of controversy in 2013 our analysts’ expectations and the company’s recent history of beating the Wall Street consensus both point to another better than Wall Street earnings report out of Lululemon. LULU’s stock is currently trading about half way between the early June peak and the late June low. Thursday’s earnings report may be the event that signals if Lululemon is back on track after a brief period of trouble or if Lauren Potdevin will have more cleaning up to do.