Options Trade – Lululemon Athletica inc. (NASDAQ:LULU) Calls
Tuesday, April 01, 2014

**OPTIONS TRADE: Buy the LULU Jun 2014 60.000 call (LULU140621C00060000) at or under $1.30, good for the day. Place a protective stop limit at $0.50 and a pre-determined sell at $2.50.

by Ian Harvey

April 01, 2014

Introduction

For the first time in over a year, shares of Lululemon Athletica inc. (NASDAQ: LULU) actually gained ground following better-than-expected quarterly results yesterday. Despite Lululemon's weaker-than-expected forward guidance, the stock rose by as much as 10% early Thursday before closing the day up 6%.

It was feared that the market might once again react unfavorably if guidance failed to give weary investors a light at the end of the tunnel.

After all, despite beating expectations in each of its previous four quarters, shares plunged every single time: once thanks to the unexpected resignation of former CEO Christine Day and three times because of disappointing guidance.

On that note, we did receive our light at the end of the tunnel Thursday morning, and it came from the words of new CEO Laurent Potdevin.

Also, Wedbush upgraded the yoga-gear retailer from neutral to outperform yesterday. Along with the upgrade, analyst Corinna Freedman boosted her price target to $64 (from $54), representing about 20% worth of upside to Friday's close. So while momentum traders might be turned off by Lululemon's decline over the past several months, Freedman's call could reflect a growing sense on Wall Street that its valuation is becoming too cheap to pass up.

Wedbush maintained its above-guide earnings-per-share estimates for Lululemon of $1.92 in 2014 and $2.20 in 2015. "We anticipate that the shares will benefit from improving weather as store traffic improves from trough levels and that the Analyst Day in mid-April will be catalyst with a focus on new product initiatives," said Freedman. "We further anticipate additional capsule product to drive interest post-Analyst Day and anticipate the company's recently issued guidance of $1.80-1.90 to prove beatable providing confidence in the new CEO's regime." When you couple that upbeat outlook with Lululemon's beaten-down stock price, it's tough to disagree with Wedbush's bullishness.

Company Details

lululemon athletica inc. is a designer and retailer of technical athletic apparel operating primarily in North America and Australia.

The Company’s yoga-inspired apparel is marketed under the lululemon athletica brand name. The Company offers a range of performance apparel and accessories for women, men and female youth. Its apparel assortment, including items, such as fitness pants, shorts, tops and jackets, is designed for healthy lifestyle activities such as yoga, running and general fitness. The Company’s fitness-related accessories include an array of items, such as bags, socks, underwear, yoga mats, instructional yoga digital versatile discs (DVDs) and water bottles.

As of January 29, 2012, its branded apparel was principally sold through 174 stores that are located in Canada, the United States, Australia and New Zealand.

Key Statistics for LULU

Current P/E Ratio (ttm) 27.5340
Estimated P/E(01/2015) 27.7666
Relative P/E vs. SPX 1.6018
Earnings Per Share (USD) (ttm) 1.9100
Est. EPS (USD) (01/2015) 1.8940
Est. PEG Ratio 1.5173
Market Cap (M USD) 7,636.42
Shares Outstanding (M) 115.41
30 Day Average Volume 3,513,766
Price/Book (mrq) 5.5311
Price/Sale (ttm) 4.7908
Dividend Indicated Gross Yield -%
Cash Dividend -
Dividend Ex-Date
5 Year Dividend Growth -
Next Earnings Announcement 06/12/2014

Technical Analysis

Lululemon Athletica inc. has a 1-year low of $44.32 and a 1-year high of $82.50. The stock’s 50-day moving average is $49.68 and its 200-day moving average is $60.69.

The company has a market cap of $7.644 billion and a price-to-earnings ratio of 27.17.

Earnings

Lululemon Athletica inc. last released its earnings data on Thursday, March 27th. The company reported $0.75 EPS for the quarter, beating the Thomson Reuters consensus estimate of $0.72 by $0.03. The company had revenue of $521.00 million for the quarter, compared to the consensus estimate of $516.80 million.

During the same quarter in the prior year, the company posted $0.75 earnings per share. The company’s quarterly revenue was up 7.3% on a year-over-year basis. Analysts expect that Lululemon Athletica inc. will post $1.92 EPS for the current fiscal year.

Accelerated Global Expansion

Lululemon will lay the groundwork for future growth after 2014 according to the CFO.

After adding 43 locations in 2013, Lululemon ended the fiscal year with 254 total locations. For 2014, it is targeting openings of 42 new corporate-owned stores this fiscal year, including locations in Austrailia and the U.K. and up to 10 new kid-centric ivivva athletica stores.

Lululemon is still planning its first stand-alone men's store for 2016, three of this year's new locations will feature a significantly larger overall footprint with an expanded men's section.

Finally, CFO John Curry confirmed that the company expects comparable-store sales to gradually improve as 2014 progresses. This will come from a combination of ongoing supply chain investments and, simply put, the string of challenges Lululemon faced in 2013.

Analysts Opinions

Besides the Wedbush upgrade, equities research analysts at Jefferies Group boosted their target price on shares of Lululemon Athletica inc. from $45.00 to $50.00 in a research note issued to investors last Friday. Jefferies Group’s price objective would suggest a potential downside of 2.34% from the stock’s previous close.

Also, the company has been the subject of a number of research reports:-

• Analysts at UBS AG raised their price target on shares of Lululemon Athletica inc. from $46.00 to $52.00 in a research note on Friday. They now have a “neutral” rating on the stock.

• Separately, analysts at Canaccord Genuity reiterated an “underperform” rating on shares of Lululemon Athletica inc. in a research note on Friday.

• Finally, analysts at Nomura reiterated a “buy” rating on shares of Lululemon Athletica inc. in a research note on Friday.

Three investment analysts have rated the stock with a sell rating, nine have given a hold rating and twelve have given a buy rating to the company. The stock has an average rating of Hold and an average target price of $61.56.

Therefore, based on the facts above the following options trade is recommended…..


**OPTIONS TRADE: Buy the LULU Jun 2014 60.000 call (LULU140621C00060000) at or under $1.30, good for the day. Place a protective stop limit at $0.50 and a pre-determined sell at $2.50.



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