Option Trade
Lululemon Athletica inc. (NASDAQ:LULU) Puts 
Wednesday, May 31, 2017

** OPTION TRADE: Buy the LULU JULY 21 2017 47.500 PUT at approximately $3.00. Place a pre-determined sell at $6.00.

Note: No protective stop losses added -- but if you wish to do so make it $1.20.

Also Note: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

by Ian Harvey                   

Lululemon Athletica inc. (NASDAQ:LULU), an athletic apparel and accessories maker, is set to post its quarterly results tomorrow, Thursday, and Wall Street isn't expecting much good news from the athletic apparel specialist.

Despite strong sales growth last quarter, shares sank after the company warned of a slow start to fiscal 2017. In fact, Lululemon's guidance calls for comparable-store sales growth to decelerate to a low-single-digit pace from the prior year's 5% boost.

Shares sank 20% in one day thanks to an earnings miss (99 cents per share versus expectations of $1.01 per share) and mere 6% same-store sales growth. Guidance was also shrug worthy, as the CEO cited a slow start to the year.

For the current quarter, Lululemon is expected to post earnings of 28 cents per share. Just three months ago, Wall Street was expected 11 cents more than that, which would have represented earnings growth. The new consensus, though, translated to a nearly 7% year-over-year drop.

This may just be LULU trying to avoid another miss by being conservative. Plus, long-term earnings growth is still expected to be 13%.  The bad news, though, is that still leaves Lululemon stock at a premium. Even after the crazy March drop, shares sport a forward P/E of 18.

Lululemon Athletica inc. has a 12 month low of $47.64 and a 12 month high of $81.81. The firm has a 50 day moving average price of $51.36 and a 200 day moving average price of $60.52. The company has a market cap of $6.57 billion, a price-to-earnings ratio of 21.68 and a beta of 0.23.

Influencing Factors to Consider

Even though the prospects for the Consumer Discretionary sector appear favorable for the first quarter, there seems to some doubt as to whether or not Lululemon will be able to follow the industry trends.

The company has underperformed the categorized Consumer Discretionary sector over the last three months, with its shares having plunged 26.2% against the sector's growth of 3.3%. This bearish run is mainly accountable to management's soft first-quarter outlook, which was provided with Lululemon's last quarterly earnings report. The drab view was based on sluggish traffic in stores and lower conversions on Lululemon's e-Commerce site, as it entered the first quarter.

Based on those trends, Lululemon projected revenues in the range of $510-$515 million, with constant dollar comps expected to decline in the low single-digits range. A likely improvement in product margin is expected to boost gross margin. However, deleverage in product and supply chain costs, and occupancy and depreciation expense due to bleak sales in the fiscal first quarter are likely to hurt results.

Further, the company predicts SG&A expenses deleverage of about 100-150 bps in first-quarter fiscal 2017, based on the sluggish comps trends.

Also, Lululemon predicted earnings in the range of 25-27 cents per share, lower than the prior-year figure of 30 cents.

Analysts and Hedge Funds Opinions

Susquehanna lowered its price target on Lululemon to $51.00 (from $57.00) while maintaining a Neutral rating, following a review of the company's digital operations.

Analyst Sam Poser notes the problems facing the company's digital platform coupled with the resignation of the head of digital suggest that management continues to face internal process concerns implying much deeper operational issues.

Also, several brokerages recently weighed in on LULU…..

Pacific Crest downgraded Lululemon Athletica inc. to a “hold” rating in a research note on Saturday, February 4th.

Stifel Nicolaus cut their target price on Lululemon Athletica inc. from $67.00 to $60.00 and set a “hold” rating on the stock in a research note on Thursday, March 30th.

Nomura cut their target price on Lululemon Athletica inc. from $72.00 to $65.00 and set a “buy” rating on the stock in a research note on Thursday, March 30th.

Finally, SunTrust Banks, Inc. set a $69.00 price target on Lululemon Athletica inc. and gave the company a “buy” rating in a research report on Saturday, April 1st.

Six equities research analysts have rated the stock with a sell rating, fourteen have assigned a hold rating, sixteen have issued a buy rating and one has issued a strong buy rating to the stock. The company currently has an average rating of “Hold” and an average price target of $61.81.

Harvey’s Options Volatility Indicator

Conclusion

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

** OPTION TRADE: Buy the LULU JULY 21 2017 47.500 PUT at approximately $3.00. Place a pre-determined sell at $6.00.

Note: No protective stop losses added -- but if you wish to do so make it $1.20.

”Success is simple. Do what's right, the right way, at the right time.”

Option Tip for your Success!

Options traders are not successful because they win.

Options traders win because they are successful.

 





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