LULU reports fiscal Q2 earnings tomorrow before the open. The options market is implying about an 8.5% one day move, which is shy to the 4 qtr avg of about 10%.
As I write, options volume is running 2x avg daily volume, with calls outnumbering puts more than 2 to 1, with the most active strikes 1600 of the Sept 12 weekly 43.50 calls, 1500 of the Oct 3rd weekly 43 calls, and 1300 of the Sept 44.50 calls.
The stock is down 35% year to date, and 51% from the all time highs made last October at $77.75. Short interest has come down with the stock price from over 30% earlier in the year, and now sits at 23%, still fairly high for a company of this size. Wall Street analysts have all but abandoned the stock as there are 10 Buys, 24 Holds and 2 Sells, with an avg 12 month price target of about $43, or about 10% higher than current levels.
Valuation, on a P/E basis is approaching levels not seen since the height of the financial crisis back in 2009, heading into a period where the stock would become a cult stock, rising more than 650%, with sales and earnings growing 30% plus a year:
Technically, the long term chart is a train-wreck, sitting above key support:
On a shorter term chart the stock looks fairly oversold,m with the prior low just above $36 from June as potential supports:
The stock is actually down in the last month, when LULU founder Chip Wilson said he would abandon his proxy fight with the company and sell half of his stake to a private equity firm (read here). So heading into tomorrow’s print, is there one more sort of “kitchen sink” quarter where management sets the stage for beat and raise quarters going forward? I have no idea, but the stock is obviously a hard press on the short side. I would also add that last week’s deal between Under Armour (UA) and Giselle, was notable as many had thought LULU was being challenged primarily by Nike and Gap’s Athleta, but UA is obviously going in for the death blow in the “Athleisure” space.
If I were to play from the long side I would not look to do so with short dated options as they are expensive, and the story is likely to take some time to improve. I would probably look to December expiration which would also catch their fiscal Q2 results in early to mid December. The trade I would do:
Hypothetical Trade: LULU ($38.25) Buy Dec 40/50 Call Spread for 2.00
Break-Even on Dec Expiration:
Profits: btwn 42 and 50 make up to 8.00 or 4x your money with max gain of 8 above 50.
Losses: btwn 40 and 42 lose up to 2.00, max loss of 2 below 40
As for those looking to play for a breakdown, its a pretty tough call. The cheapest protection for long holders is probably the weekly Sept 12th 36 puts at .55, stopping you out below the prior lows, right about at the implied move. From a directional standpoint though, these puts have a low probability of success and would take a an out-sized move just to break-even and the move would have to happen in the next couple of days. Looking farther out the Oct 37.5/32.5 put spread is decent at 1.45 but again, this is playing for the death blow from the 52 week lows.