Lululemon Earnings Preview: 2 Trades for LULU Stock

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Earnings season is winding down once again, but there are still few trading opportunities left in the hopper. One such opportunity arrives Tuesday morning, when yoga-inspired athletic apparel manufacturer lululemon (LULU) steps up to release its first-quarter earnings report.

Lululemon logo LULUBy the numbers, Wall Street is expecting first-quarter earnings to dip 3% to 33 cents per share from 34 cents per share in the year-ago period. Revenue, meanwhile, is seen rising roughly 8.9% to $418.9 million for the quarter.

Historically, lululemon has blown past Wall Street’s predictions, having bested the consensus estimate in every quarter for the past four years. As such, it should come as no surprise that the EarningsWhisper.com reports a first-quarter whisper number for LULU earnings of 36 cents per share — 3 cents higher than than Wall Street’s target.

Technically speaking, while 2015 appears to have been kind to LULU stock, most of the stock’s 10% year-to-date gains came in the first few weeks of the year. In fact, LULU met with firm resistance at $70 in March and April, with the last rejection sending the shares through former support at $65 to lick their wounds and consolidate near $60.

Furthermore, with LULU stock unable to overcome short-term resistance at its 10-day moving average, the shares are being squeezed into $60.

Checking in with LULU’s sentient backdrop, we find a wealth of bullish activity. For instance, 17 of the 37 analysts following the shares rate them a “buy” or better, compared to 15 “holds” and five “sell” ratings. The 12-month consensus price target of $70, meanwhile, represents a modest premium of about 14% to LULU’s current trading range.

Outside the brokerage community, short interest accounts for a respectable 14.8 million shares, or 12.3% of the stock’s total float. That said, LULU options activity suggests that short sellers are hedging their bets. The weekly June 12 series put/call open interest ratio currently rests at 0.38, with calls nearly tripling puts among options set to expire at the end of next week. This ratio rises only mildly when pulling back to monthly June options, arriving at 0.48.

06-05-2015 LULU
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 Overall, weekly June 12 series implieds are pricing in a potential post-earnings move of about 6.3%. This places the upper bound near $65.41, while the lower bound rests at $57.59. The upper bound lies near resistance at $66 and LULU’s 50-day moving average,while the lower bound lies below support at $58.

Optimism on an underperforming stock is often seen as a bearish indicator from a contrarian perspective, and LULU has certainly underperformed so far in 2015. As such, any downside move could be exacerbated as most investors would be caught off guard by the decline.

By the same right, any post-earnings rally would be just as muted given that most investors would be expecting the move.

2 Trades for LULU Stock

Put Spread: With sentiment trending bullish and LULU stock struggling to find footing, the path of least resistance appears to lie to the downside. As such, traders looking to bet against the prevailing winds in the options pits might want to consider a weekly Jun 12 series $57.50/$60.50 bear put spread.

At last check, this spread was offered at 41 cents, or $41 per pair of contracts.  Breakeven lies at $60.09, while a maximum profit of $2.59, or $259 per pair of contracts, is possible if LULU closes at or below $57.50 when June options expire.

Call Sell: If betting directly against LULU stock isn’t your style, you might consider entering a weekly Jun 12 series $70 strike call sell position. Such a trade is especially useful if you already own LULU stock, as it allows you to offset some of your portfolio losses in the event of a selloff, but also allows you exposure to any upside up until the stock trades at or above $70.

At last check, this option was bid at 39 cents, or $39 per contract. A sold call allows you keep the premium as long as LULU stock closes below $70 at expiration. On the downside, if the stock rallies above $70 prior to expiration, you could be forced to provide 100 shares at LULU’s current market value for each call sold, which could be quite costly if you do not have enough stock on hand to cover the call.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/06/lululemon-athletica-inc-lulu-earnings-preview-2-trades-lulu-stock/.

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