Event: LULU reports its fiscal Q3 earnings on Thursday, December 12th before the market open. The options market is implying about a 7% one day move, which is slightly below the 4 quarter average of about 7.75% and the 8 quarter average of about 7.5%.
Sentiment: Wall Street analysts are relatively negative on the stock, with 13 Buys, 14 Holds and 5 Sells, though the average 12 month price target is around $75. The stock is actually down 10% in 2013. Short interest has been between 15% and 20% of the float for the past 6 months.
Options Open Interest: Open interest is almost equally split between calls and puts, and the 1 month average volume has also been about equally split. The Dec and Jan14 70 calls are the lines with the most open interest, both more than 7k.
Price Action / Technicals: LULU has developed a wedge pattern on the daily chart, with a series of lower highs and higher lows since the stock’s huge range in June:[caption id="attachment_33634" align="alignnone" width="600"] LULU daily, Courtesy of Bloomberg[/caption]
The stock’s move on earnings will likely dictate the next significant sustained move for LULU on a break of the wedge. The upside of the wedge registers around $74-$75, while the downside is near the November low in the $66-$67 area. On a longer-term basis, the $60 level is crucial support, while the all-time of $82.50 in June will be very difficult to breach on the upside.
Volatility: Implied volatility has risen to near the 50 level ahead of earnings, while realized volatility has remained quite low as the stock remained rangebound:[caption id="attachment_33635" align="alignnone" width="600"] LULU 30 day implied vol (red) vs 30 day realized vol (blue), Courtesy of LiveVolPro[/caption]
Implied volatility will likely move to around 30 after the event, and possibly lower given the upcoming holiday season.
Our View: I ran through a number of fundamental and technical arguments on the bull and bear side in LULU in a Name That Trade post almost a month ago. LULU has been an extremely expensive retail stock compared to peers for a couple years now, but the stock has mostly corrected through time (2 years of consolidation) rather than price, frustrating bulls and bears alike. The valuation is more reasonable today, so the pivotal aspect for the stock today is business execution. Earnings will give more clarity on that. We have no interest in a position, as it looks like a flip of the coin to us on most major inputs.