By now, most investors have probably read or heard about the Wall Street Journal article from September 18, suggesting that the mere mention of a stock by hedge fund manager David Einhorn has a damning effect, long or short, in the 30-day period immediately following his words of wisdom. The Journal looked at 22 companies and found that the nine about which his comments were perceived as negative, saw their stocks drop 13% in the following month and in the 13 cases where his comments were perceived as positive, the stocks gained 10% in the next month's trading. They call it "being Einhorned." Heaven help your company if it gets the PowerPoint presentation; it's the kiss of death.

It's interesting, therefore, that on the same day the Journal was talking about the Einhorn Effect, a rumor was circulating that Greenlight Capital (Nasdaq:GLRE) had taken a short position in yoga sensation lululemon (Nasdaq:LULU). In June, the same rumor sent lululemon shares down by more than 7% in one afternoon of trading. While there's no way to confirm or deny the rumor, I can think of three reasons why Einhorn would want to short its stock.

Discount Brokers Comparison: Your one-stop shop for finding the perfect broker for your investments

More Money than Brains
According to Ashley Lutz of the Business Insider, there is a woman in California who has spent $15,000 over the past five years on lululemon clothing alone. The one-time electrical engineer and now stay-at-home mom even has her own website worshipping its products. Practicing Mitt Romney's ingratiating manner, Carolyn Beauchesne explains in the comments section of Ms. Lutz's article that $3,000 a year on workout clothes isn't a big deal given lululemon's demographic. Hasn't that been the problem haunting lululemon all along - that its clothes were for women and men who have more money than brains?

At some point the shorts - in the past they've included Whitney Tilson's T2 Partners - feel these brand-obsessed dilettantes will come to their senses and the gravy train will end for Chip Wilson, Christine Day and all the others who benefit from lululemon's success. Maybe David Einhorn has figured this out and will produce his findings during his speech at the Value Investing Congress on October 2. Last year he brought the now infamous Green Mountain Coffee Roasters' (Nasdaq:GMCR) PowerPoint presentation and we all know how that turned out.

SEE: How Companies Create a Brand

Here Comes Athleta
If you haven't noticed, Gap (NYSE:GPS) is firing on all cylinders these days. Its stock is up 94.45% year-to-date as of September 20, almost 58 percentage points higher than lululemon. Gap has outperformed lululemon over the past one-year and five-year periods. It's hiring all kinds of talented people who are committed to toppling the yoga queen. In the second quarter, its Athleta brand (the biggest competitive threat) opened 11 stores, an excellent result for a retail team that's been together for less than 18 months. By January 2013, it will have 35 stores open and at least another 15 on tap for 2013.

Given that Athleta will open 25 stores in 2012, I'd guess the real number in 2013 won't be much different from this year, so expect it to have 60 stores open by January 2014. Clearly that pales in comparison to lululemon's 119 stores in the United States at the end of July, but it's closing fast. In July, Bloomberg ran an article highlighting the ways in which Athleta imitates lululemon's operation, including putting stores nearby and running yoga classes inside its locations. There are two things that will ingratiate consumers to Athleta's way of doing business: first, its products are of similar quality and up to 30% less expensive; second, it's offering yoga teachers a 30% discount on merchandise, compared to the 15% lululemon offers. Considering Gap only bought Athleta in 2008 and opened its first retail store in January 2011, the progress it's made is significant.

The Patent Play
lululemon's most recent move to protect its turf is suing Calvin Klein and G-III Apparel Group (Nasdaq:GIII) for infringing on three design patents related to its Astro yoga pants. Design patents allow apparel companies to inexpensively protect a unique design for up to 14 years. Unfortunately, lululemon's lawsuit will have to demonstrate that Calvin Klein's pant is substantially similar in the eyes of an everyday person. Word on the street is that the waistbands of the two brands are completely different and lululemon has no case. It's possible that Einhorn's hired an expert to confirm this, knowing the court's rejection of lululemon's claims will broadcast to the world that its products are as the shorts always believed - good marketing and nothing more. Of the three reasons I've listed, this is probably the one most damaging to its future growth.

SEE: Patents are Assets, So Learn How to Value Them

The Bottom Line
David Einhorn's speech is less than two weeks away. Lululemon shareholders best pray he catches a cold and can't make the speaking engagement, because his words could be fatal.

At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    Will J.C. Penney Come Back in 2016? (JCP)

    J.C. Penney is without a doubt turning itself around, but that doesn't guarantee the stock will respond immediately.
  2. Stock Analysis

    Why did Wal-Mart's Stock Take a Fall in 2015?

    Wal-Mart is the largest company in the world, with a sterling track-record of profits and dividends. So why has its stock fallen sharply in 2015?
  3. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  4. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  5. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  6. Investing

    Retailers Rebel Against Black Friday: Bad Move?

    The Black Friday creep may have hit a wall as some stores are shutting their doors on Thanksgiving and even Black Friday to give employees the day off.
  7. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  8. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  9. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  10. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center