Lululemon Athletica Inc. (NASDAQ:LULU) upped its fourth-quarter 2016 guidance on Jan. 9; since then, LULU stock has actually lost over 7%, rather than gain on the news.
LULU is a tough stock to get a handle on. One minute investors are all doom and gloom about the company’s future and the next minute they’re singing its praises. It’s certainly got pretty wide high-low price spreads.
In the past five fiscal years, LULU stock, as you’ll see in the table below, had an average annual spread of $29.45. By comparison, VF Corp (NYSE:VFC), a competitor to LULU through its Lucy athleisure brand, had a $15.34 spread in fiscal 2016 and $16.23 in fiscal 2015. It’s not nearly as volatile, despite a business that has been affected by the department store decline.
Lululemon High-Low Price Spreads 2012-2016
| Fiscal Year | High | Low | Spread |
| 2016 | $81.81 | $54.00 | $27.81 |
| 2015 | $69.77 | $44.09 | $25.68 |
| 2014 | $67.48 | $37.25 | $30.23 |
| 2013 | $82.28 | $45.68 | $36.60 |
| 2012 | $80.30 | $53.35 | $26.95 |
Rather than run away from Lululemon stock because it is so volatile, learn to embrace this volatility for your own gains.
In mid-February, technical analysis guru Tyler Craig provided InvestorPlace readers with an options trade that would generate a $110 profit for every bull put spread option acquired at that time with a March 18 expiry.
Craig recommended this bet as a way for investors to benefit should LULU shares continue to decline — down $5 in the first six weeks of the year after gaining 30% in December on good Q3 2016 results — without risking too much if LULU stock turned higher.
With the options ready to expire at the end of the week and LULU not announcing Q4 earnings until March 30, it looks as though his bet’s going to play out.
He’s talking about options; I’m talking about buy-and-hold.
For those who believe in Lululemon and LULU stock, as I do, you need to buy when things are bleakest because that’s when you can best take advantage of the market volatility.
Last September, LULU delivered very respectable Q2 2016 earnings, but those in the media chose to ignore all the good news and instead focus on the company’s so-called “soft” guidance for the remainder of the year.
On Sept. 2, I recommended that investors buy LULU stock after it dropped more than 10%, closing the day’s trading at $68.57. Since then it has moved down as low as $55 before recovering to where it sits now as a result of good third-quarter earnings.
If there’s one thing I’ve learned about LULU CEO Laurent Potdevin, it is that he doesn’t overreach; he won’t say something in a press release or conference call if he’s not confident that it’s truly reflective of its business.
“We had a strong holiday season in both our store and digital channels driven by our assortment, operational execution and guest experience,” Potdevin stated in its Jan. 9 guidance update press release. “Our entire team is excited about the momentum in the business and I am grateful to our global collective for their great work and enthusiasm. We look forward to 2017 as we continue to advance on our long term goals.”
Translation: Business is just fine, thank you very much.
Bottom Line for LULU Stock
LULU announces fourth-quarter earnings at the end of March. I would be shocked if Q4 2016 earnings per share weren’t higher than its $1.01 high-end revised guidance from early January.
Why?
“We believe the sale deceleration in the final 30 days of the quarter was caused in part by fewer fresh recedes,” said Urban Outfitters, Inc. (NASDAQ:URBN) CEO Richard Hayne during its Q4 2016 conference call. “January is no longer a clearance month. She wants new fashion and the brand didn’t offer her enough of it.”
Hayne was talking about his own company’s inability to deliver new stuff in the new year which affected revenues in the final month of its fiscal year. I don’t believe LULU will suffer that same fate. We’ll know in two weeks.
Here’s what we do know.
In the last five fiscal years, LULU stock has traded below $55 in every one of those years; the odds that it will do it again sometime in the remaining 46 weeks of the fiscal year are high.
If you look at the midpoint of each year’s spread, they all come in around $65. It’s currently trading below that. I thought it was a buy at almost $69 back in September; I definitely think it’s a buy at $64 and change.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
