Athletic apparel manufacturer Lululemon Athletica Inc. (NASDAQ:LULU) will step into the earnings limelight this Wednesday, and the company is facing a potential hard sell to investors. Essentially, the “athleisure” trend is dying. The fashion trend that saw a rise in popularity for athletic gear among those less athletically inclined is giving way to an industry stalwart — denim — an area in which Lululemon has virtually no presence.
Not only will this make guidance an issue for LULU stock, it will also significantly undermine year-over-year comparisons, setting up a potential bearish play heading into earnings.
By the numbers, Wall Street is expecting third-quarter earnings to rise 22.8% year-over-year to 43 cents per share from 35 cents per share. Revenue, meanwhile, is seen rising roughly 12.7% to $540.43 million for the quarter.
But targets may be set even higher for Lululemon stock. For instance, EarningsWhispers.com reports a third-quarter whisper number of 45 cents per share — two cents higher than the consensus.
Checking in with LULU’s sentient backdrop, we find that the brokerage community is slowly distancing itself from Lululemon stock. Last week, Canaccord Genuity downgraded the stock to “sell” from “hold” and cut its full-year/fourth-quarter earnings outlook.
Despite the downgrade, 17 of the 33 analysts following LULU stock still rate the shares a “buy” or better, leaving plenty of room for more brokerage firms to follow Canaccord’s lead. There is even room for price-target cuts, with the 12-month consensus price target of $67.30 resting nearly 22% north of LULU’s current trading range.
Outside the brokerage community, short interest fell during the most recent reporting period. Normally, a sharp drop in short interest results in an upside move in the stock due to added buying pressure. Yet, LULU stock failed to see any significant rally from the short-covering, indicating weak buying support for the shares.
As such, even though about 13.5% of LULU’s float remains sold short, continued short covering should have little effect on Lululemon stock.
Click to Enlarge Furthermore, LULU stock options activity suggests short sellers are not hedging their bets ahead of earnings. Currently, the December put/call open interest ratio arrives at 0.99, indicating a bearish lean from speculative investors. However, the weekly Dec 9 series put/call OI ratio of 2.79 reveals a downright bearish outlook — nearly three puts open for every one call — from those traders betting directly on Lululemon’s quarterly report.
Overall, weekly Dec 9 series implieds are pricing in a potential post-earnings move of about 9.5% for LULU stock. This places the upper bound near $60.50, while the lower bound rests at $50. On the upside, LULU is facing resistance from its 10-day and 50-day moving averages, as well as round-number resistance at $60. On the downside, $54.50 is short-term support, with the $50 level providing the nearest firm backstop.
2 Trades for LULU Stock
Put Spread: With sentiment shifting from bullish to bearish, LULU stock struggling to find buyers even as short sellers unload positions and shifting fashion trends moving away from Lululemon’s core business, the situation doesn’t look good. As such, traders looking to bet on a post-earnings decline for LULU stock might want to consider a Dec $50/$52.50 bear put spread.
At last check, this spread was offered at 75 cents, or $75 per pair of contracts. Breakeven lies at $51.75, while a maximum profit of $1.75, or $175 per pair of contracts, is possible if LULU stock closes at or below $50 when December options expire.
Call Sell: If betting directly against LULU stock isn’t your style, you might consider entering a weekly Dec 9 series $63 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 $63.
At last check, this option was bid at 45 cents, or $45 per contract. A sold call allows you keep the premium as long as LULU stock closes below $63 at expiration.
On the downside, if the stock rallies above $63 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.
