Lot78 (LOTE): A Glorified Fad Headed for the Discount Bin?

by Melissa Davis, 5/2/2013 10:43:16 AM

As an overhyped microcap name touted by dubious stock promoters, Lot78 (OTC: LOTE) sure looks like a fashion stock that will soon go out of style. After rocketing all the way from $1 to $9 a share in recent weeks – an inexplicable spike that has left the bleeding retailer with a bloated $500 million market value that now exceeds 1,000 times its prior-year sales – LOTE bears an awfully close resemblance to another hot fashion pick that wound up with the shelf life of a momentary fad.

Forget about all of the warnings that LOTE has included in its official regulatory filings for a moment: the modest sales, totaling less than $500,000 annually, that actually declined last year; the relentless losses and lack of cash that drove the company to borrow $40,000 from its founder just to stay afloat; the onerous debt, owed to its major shareholder, that literally exceeds the dwindling sales mustered by the company over the course of the past year; the doubt expressed by its independent auditor over its very chances of survival; even the insolvent status of the company reflected by the imbalance between the meager assets and the far larger liabilities recorded on its books.

In fact, go ahead and forget about the reverse merger that magically transformed the company from a defunct energy firm into a highflying retailer – using a vehicle long associated with “pump-and-dump” schemes – that has somehow exploded to reach double-digit prices rarely achieved (let alone maintained) on the lowly penny-stock exchange. Granted, under the terms of that reverse merger, the original owners of the empty shell wound up holding almost half of the stock that now trades under the LOTE symbol and now stand to make a tremendous fortune by unloading those expensive shares with the stock in overdrive. Of course, now that LOTE has mysteriously surfaced on a foreign stock exchange that’s particularly vulnerable to manipulation, those lucky investors could further boost their outsized gains by actually selling some of that overvalued stock short – effectively betting on its decline -- and hitting a nice jackpot on any future collapse.

Overlook the fact that the founder’s citizenship makes it virtually impossible for poor, disgruntled shareholders to seek justice, should the need arise. Indeed, filings state:

"Our sole officer and director, Mr. Oliver Amhurst, is a resident of Great Britain. As a result, it may be difficult or impossible for our investors to effect service of process within the United States upon him, to bring suit against him in the United States or to enforce in the United States courts any judgment obtained there against him predicated upon any civil liability provisions of the United States federal securities laws."

Forget that, anyway. Simply focus on the glossy newsletter mailed to thousands of potential investors – courtesy of a massive publicity campaign with a $2.5 million budget that actually exceeds the total sales achieved by LOTE to date – instead.

Lululemon: Sheer lunacy

by Sonya Colberg, Senior Investigative Reporter, 4/18/2013 1:44:10 PM

Lululemon Athletica’s pants fiasco is just getting worse, forcing the yoga gear company into a futile battle that we believe will persist and lead to missed earnings.

Lululemon (NYSE:LULU) CEO Christine Day stated that the company’s recent recall of too-sheer pants was limited: “So it’s just the black pant in particular.”

The pants debacle cost LULU an estimated $75 million -$86 million expected to cut earnings per share by 11 cents to 12 cents. But now, the company has pulled more garments and even more recalls could be ahead.

Last Friday, the company pulled clothing made of its candy-striped Luon fabric but did so quietly, notifying only a minority of customers who happened to catch the recall mention on LULU’s Facebook page. This comes almost a month after the initial recall of the core black Luon women’s pants. TheStreetSweeper wanted to ask LULU why the candy-striped bottoms were no longer listed on its website this week but LULU declined an interview.

Even more clothes may need to be recalled because the sheerness problem would be as bad or worse than the black Luon garments because of the characteristics of the fabric, according to a source with 29 years of experience, including many years with a key competitor. 

Photographs show some colored pants offer little more coverage than panty hose.

The company, meanwhile, is striding forward in its tried-and-true fashion of not discounting, Day also assured analysts during the March 21 conference call. 

Here’s what she said:

“We achieved these results in a very brand-appropriate way, and did not buy our comps through discounting, which ultimately would have harmed the brand. We maintained a full price strategy up to the holidays, then used our traditional warehouse sales as an effective and low-risk way to clear our inventory.” (italics added)

Just one week after she made that statement, the company quietly held a massive weekend sale.

LULU customers in New York, Dallas, Los Angeles and other cities sorted through racks loaded - and often reloaded - with numerous garments over three days. These were not just last season’s styles and colors but also new styles, according to our checks of more than 20 stores. In one case, the sale was so secretive that an irate customer said that, the day before the sale began in a New York City store, an assistant manager left a message on her phone saying there would be no sale. 

 The sales - which clerks or educators typically referred to as “markdowns,” (one former clerk says the word “sale” was strictly forbidden) - are common and continuing. Indeed, significant markdowns were offered in many stores we checked on again last weekend. 

Educators in Las Vegas and Seattle stores said that customers can always find a rack or two of new and older styles marked down. In fact, the sales are directed by corporate headquarters, as a Vegas educator said that, while the store can exercise autonomy, it also gets weekly calls from corporate to learn which items to mark down.

Photos showing recent sales racks in stores across the country, along with discounted inventory and price tags are here,  set2, set3, set4, set5, set6, set7,  set8, set9., set10, or set11. 

LULU’s strategy of scarcity is the coveted key to keeping customers running to its stores to buy yoga gear on the spot at full price. This is not just something she alluded to in the March 21 conference call. Day has made it obvious time and again that brand-harming discounting is not the LULU way.

“Our guest knows that there’s a limited supply, and it creates these fanatical shoppers,” Day told The Wall Street Journal last year.

And in an interview on CNBC in January, Day reiterated LULU’s disdain of  promotions: “You’re either going to play in that game of discount or you’re not. And we’re in the ‘not’ category,” Day said.