June 9, 2014 / 5:39 PM / in 4 years

Short sellers pile into Lululemon ahead of quarterly results

TORONTO, June 9 (Reuters) - Lululemon Athletica Inc’s shares have fallen about 50 percent in the last 12 months amid a slew of missteps, and some traders are now betting that there’s more bad news to come from the Canadian yogawear retailer.

The stock is one of the most heavily shorted companies in North America among those reporting earnings this week, even though it is expected to report steady first quarter earnings and slightly higher revenue on Thursday.

Shares of Lululemon, which peaked at over $82 a share a year ago, were up less than a percent at $44.70 in afternoon trading on the Nasdaq on Monday.

The trendy Vancouver-based retailer has been plagued by supply chain challenges, the departure of its chief executive officer and chief product officer, and a PR snafu by its founder and chairman, Chip Wilson, who said “some women’s bodies just actually don’t work” for Lulu’s pants: all fallout from a high-profile recall of overly sheer yoga pants more than a year ago.

Despite moves to right the ship, some traders and analysts are still skeptical about Lululemon’s prospects.

Lululemon has 10.6 percent of its shares on loan, according to financial information provider Markit. The data indicates a sizable chunk of traders expect results to disappoint.

Traders who sell securities “short” borrow shares and then sell them in the hope that the price will fall, so they can buy them back more cheaply, return them to the lender and pocket the difference.

Short interest data from Nasdaq paints an even more dire picture with data as of mid-May indicating that short interest in Lululemon is at its highest level in a year with more than 24.6 million shares being shorted.

Given that roughly 28 percent of the company’s shares are held by founder Wilson, this means that nearly a quarter of the company’s free float of roughly 105 million shares is being shorted.

Based on average daily trading volume in Lululemon’s stock, the Nasdaq data indicates it would take over 10 days for short sellers to unwind their positions in the stock.

“More investors appear to hold the view that 2013 was likely just the start of Lulu’s productivity and margin declines and that CEO (Laurent) Potdevin won’t be able to course-correct the ship,” Brian Tunick, an analyst at J.P.Morgan, wrote in a client note on the short interest.

But Tunick said it was still early, given Potdevin and chief product officer, Tara Poseley, are still fairly new.

The large short position and the nearly 50 percent share price decline in Lululemon’s stock price over the last 12 months may not be all bad news for investors betting on a rebound.

Bearish traders that sold the stock short would be forced to buy shares to avoid big losses on their positions - something that only serves to work against short sellers and push a stock higher.

Many analysts believe the international market could be a key earnings driver in the future. Lulu’s first European store in London, which opened on March 28, was exceeding sales targets by 60 percent, analysts said. (Reporting by Solarina Ho and Euan Rocha in Toronto)

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