While the earnings calendar is winding down for the end of Q1 reports, a handful of potential trading opportunities are still marching out to meet us. One such opportunity arrives Thursday morning, when yoga-inspired athletic apparel manufacturer Lululemon (LULU) steps into the earnings limelight.
Currently, Wall Street is expecting first-quarter Lululemon earnings to arrive flat with last year’s results, coming in at 32 cents per share of LULU stock. Revenue, meanwhile, is seen rising roughly 10% to $381.16 million for the quarter.
Historically, Lululemon has had little trouble topping the consensus estimate, having done so in each of the past 12 reporting periods. As such, it should come as no surprise that the whisper number for LULU earnings arrives 3 cents higher than Wall Street’s target.
Despite this apparent prowess in the earnings confessional, LULU stock has not responded in kind. In fact, shares have plunged more than 20% so far in 2014, with poor earnings guidance sticking in the craws of many investors. That said, Lululemon shares have established a firm base in the $45 region, which could be a sign that LULU stock has found a bottom.
At the sentiment backdrop, we find a wealth of bearish activity. For instance, 17 of the 33 analysts following the shares rate them a “hold” or worse. Additionally, short interest accounts for a sizable 24.7 million shares, or 18.3% of the stock’s total float.
Options traders are also betting heavily against LULU stock, with the June put/call open interest ratio of 1.33 pointing toward a clear preference for puts over calls. Furthermore, this negativity increases significantly when we zoom into the weekly June 13 contracts, where the put/call open interest ratio balloons to a hefty 2.72.
Taking a closer look at LULU’s June 13 weekly options reveals that implieds are pricing in a potential post-earnings move of about 9.7%. This places the upper bound near $49.37, while the lower bound rests at $40.63. Those are important bounds, too, as the upper bound lies just shy of potential resistance at $50, while the lower bound lies well below LULU’s annual low.
Pessimism on an underperforming stock is par for the course, and Lululemon certainly has attracted its fair share. As such, any downside move could be muted given that nearly everyone is already anticipating a plunge for LULU stock.
With the bar set so low, any sliver of positive news could prompt a quick reversal for LULU.
Options Trade on LULU Stock
For those options traders willing to take a chance on a contrarian position, a July $45/$50 bull call spread has a good shot at hitting a maximum return. At the close of trading on Monday, this trade was offered at $1.91, or $191 per pair of contracts.
A maximum profit of $3.09, or $309 per pair of contracts, is possible if LULU stock closes at or above 50 when July options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.