When you are competing in an athletic apparel market rife with the likes of Nike Inc (NYSE:NKE), adidas AG (ADR) (OTCMKTS:ADDYY) and Under Armour Inc (NYSE:UAA), it’s easy to get lost in the shuffle. Known mostly for it’s women’s yoga apparel, Lululemon Athletica inc. (NASDAQ:LULU) is one such company lost in a wide field of competitors.
It’s easy to underestimate the company’s growth prospects, and Lululemon stock traders would do well to keep a close watch on the shares heading into this month’s quarterly earnings report.
It’s no secret that the “athleisure” trend in sports apparel is dead. Denim is the new black, apparently, and the transition away from the company’s sweet spot left Lululemon in the lurch. But while it took the company a couple quarters to transition, Lululemon is back on a solid growth track.
In fact, it may not have left that track at all. During the past five years, Lululemon has seen sales nearly triple, and projections are for 30% earnings growth in the summer quarter.
But while guidance will be key for LULU going forward, recent quarter results will go a long way toward reaffirming bullish opinions on Lululemon stock. By the numbers, Wall Street is expecting fourth-quarter earnings to rise 18.8% year-over-year to $1.01 per share, on an 11.2% jump in revenue to $783.5 million for the quarter.
There is a touch of optimism in Wall Street’s estimates, however, as EarningsWhispers.com puts the fourth-quarter whisper number at $1.03 per share — two cents higher than than the consensus.
Speaking of sentiment, the brokerage community remains rather dour on LULU, despite the company’s continued fundamental outperformance. According to Thomson/First Call, only 18 of the 36 analysts following Lululemon stock rate the shares a “buy” or better. Furthermore, the 12-month consensus price target of $73.81 represents a modest premium of about 15.4% to yesterday’s close.
Outside the brokerage community, short interest rose 2% during the most recent reporting period. As a result, some 9.9 million shares of Lululemon stock — 9.29% of the float — is now sold short and could provide fuel for a short-covering rally following another solid quarterly performance.
Click to Enlarge Meanwhile, Lululemon’s options activity suggests short sellers are not hedging their bets ahead of earnings. Currently, the April put/call open interest ratio arrives at 0.86, indicating a bearish lean from speculative investors. The 31 March series put/call OI ratio of 1.31 offers up a considerably bearish outlook for those options most affected by Lululemon’s quarterly report.
Overall, 31 March implieds are pricing in a potential post-earnings move of about 7.75% for Lululemon stock. This places the upper bound near $68.96, while the lower bound rests at $59.04. On the upside, Lululemon stock has resistance at $70, leaving plenty of room for the shares to run, while support on the downside should hold near $60 over the short term.
2 Trades for Lululemon Stock
Call Spread: LULU’s ordered pullback heading into its end of the month quarterly report should be seen as a buying opportunity for the shares — especially given the company’s strong third-quarter showing. Traders looking to bet on a post-earnings rally might want to consider an April $67.50/$70 bull call spread. At last check, this spread was offered at 74 cents, or $74 per pair of contracts. Breakeven lies at $68.24, while a maximum profit of $1.76, or $176 per pair of contracts, is possible if Lululemon stock closes at or above $70 when April options expire.
Put Sell: For those traders bullish on Lululemon but concerned about a muted earnings reaction, a LULU put sell may be just the neutral path you are looking for. At last check, the April $59 put was bid at $1.11, or $111 per pair of contracts. As long as Lululemon stock trades above $59 through expiration, traders pursuing this strategy will keep the $111 premium. If LULU trades below $59 ahead of expiration, however, you could be assigned 100 shares for each contract sold at a price of $59 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
