$LULU Fiscal Q4 Earnings Preview

by Dan March 29, 2016 11:57 am • Commentary• Trade Ideas

Event: Lululemmon (LULU) reports their fiscal Q4 results tomorrow before the open. The options markets is implying about a 9% one day post earnings move, which is shy of its 4 quarter average one day move of about 11% and its 10% one day average since its ipo in mid 2007.  The last two quarters the stock has seen one day declines of  13 & 16%

Price Action / Technicals: There are few stocks in the market you could say this about, but LULU has not been down on the year, and is massively outperforming, up about 15% in 2016.  The stock is up about 40% from its 52 week lows made in November.

On a short term basis the stock is clearly in an uptrend from the November lows, and has been range bound between $55 and $65 for most of 2016, now about in the middle of that range:

[caption id="attachment_62475" align="aligncenter" width="600"]LULU 6 month chart from Bloomberg LULU 6 month chart from Bloomberg[/caption]

Taking a view from the stock’s all time highs made in 2014, it has made a series of lower highs an appears to be in a long term downtrend:

[caption id="attachment_62476" align="aligncenter" width="600"]LULU 5 year chart from Bloomberg LULU 5 year chart from Bloomberg[/caption]

A break above the downtrend would easily put $70 in play in the coming weeks, but a failure below recent support would put the low $50s in play.

Options Volatility and Open Interest Snapshot: Despite the implied move being below that of the long term average realized post earnings move, and implied volatility (the price of options – blue line below) being below levels of the last three earnings reports, options prices appear expensive relative to realized volatility (how much the stock has been moving – white below):

[caption id="attachment_62478" align="aligncenter" width="600"]LULU 1yr chart of 30 day at the money implied volatility vs realized volatility from Bloomberg LULU 1yr chart of 30 day at the money implied volatility vs realized volatility from Bloomberg[/caption]

While the low levels of realized volatility is clearly reflected in options prices, the level of interest by investors in LULU options is also interesting with open interest very near 52 week lows, and total options volumes just off of 52 week lows:

[caption id="attachment_62477" align="aligncenter" width="600"]LULU open interest vs options volume from Bloomberg LULU open interest vs options volume from Bloomberg[/caption]

As for open interest, the single largest line is 7800 of the Jan17 65 calls, but after that the next six strikes are all puts, all in April (6k of the Apr 60 puts, 5600 of the April1st 60 puts, 5200 of the April1st 55 puts, 3600 of the April1st 54 puts, 2500 of the April1st 60.6 puts and 2200 of the April 56 puts).

Sentiment: Wall Street analysts remain fairly mixed on the stock with 22 Buy ratings, 15 Holds and 5 Sells with an average 12 month price target of $62.40, not much above where it is currently trading.  Short interest sits at a whopping 20% of the float.

Valuation: despite low teens sales growth for the last few years, eps has declined low single digits during that time period, shining a bright light on the stock’s P/E of about 30.

My View: if the company were able to post a beat and raise fiscal 2017 guidance then a short squeeze to the tune of 10% seems very likely given high short interest and the potential for analysts to upgrade the stock. Any material bump to eps guidance on margin improvement would make the forward P/E of 28 look fairly attractive on mid-teens expected sales growth.

That said a low quality quarter and a guide lower and the stock is likely down for the third straight quarter greater than the implied move.

I have no strong opinion on the stock, aside from its relative strength year to date which should not be ignored.  30% of LULU’s sales come from outside the U.S. largely Canada, and some Asia, so the dollar could be a wildcard as was the case with Nike last week.

We will follow up with some trade ideas for those who have a directional inclination or are currently positioned into the print.


Estimates and Forecasts from Bloomberg:

4Q adj EPS est. 80c (range 78c-82c); co. forecast 78c-80c (Jan. 11)
4Q rev. est. $693.1m (range $680m-$699m), co. forecast $690m-$695m
4Q total comp. sales est. (including DTC) +8.5%, comp. sales est. +4.8% (Consensus Metrix, avg of 25), saw total comp. sales up high-single digits
4Q gross margin est. 49.3%, co. forecast 49%-50%, vs 51.5% y/y
1Q adj EPS est. 37c (range 32c-41c)
1Q rev. est. $485.4m (range $470m-$516m)
1Q gross margin est. 48.05% vs 48.6% y/y
FY17 adj EPS est. $2.17 (range $1.73-$2.60)
FY17 rev. est. $2.34b (range $2.27b-$2.59b)
FY17 gross margin est. 49% (range 47.8%-50%)

Analyst Commentary from Bloomberg:

* Oppenheimer (outperform): As of 1/11 update, thinks comps were running above raised forecast; no slowdown in Jan.
* Conservative guide with 2H-weighted year already expected due to elevated inventories
* Potential for LULU’s EPS to finally inflect in FY17,beyond, as co. begins to realize benefits from supply chain investments, manages inventories
* Baird (outperform): LULU has delivered upside to post-holiday 4Q guidance in each of last 5 yrs
* Consensus gross margin est. appears achievable, especially given strong full-price selling through holiday period
* Sees FY17 view reflecting continued sales momentum (strength in bottoms, men’s; opportunity in tops in 2H), improved margins weighted to 2H (reduced markdowns,
supply chain efficiencies)
* Bloomberg Intelligence: 1H sales may be helped by easier comparisons after West Coast portdelays last year, stronger sports-apparel sales in March
* Stronger US$ may lead to “guarded outlook,” with FY17 opportunitites from men’s, online, global expansion
* MKM Partners (buy): Sees 4Q comp. sales momentum, q/q improvement in margin
* Expects elevated 4Q inventory to “significantly” lessen in 1Q as co. anniversaries port issue; should remove key overhang
* Co. forecast likely to reflect more gradual gross margin
improvement vs. street, modest SG&A deleverage
* Wedbush (outperform): Expects strong top-line momentum to continue throughout year
* Significant gross margin recovery opportunity beginningin 2Q should “quiet skepticism, generate upside to consensus EPS forecasts, and lift shares throughout the
* Stock reaction to 4Q results largely depends on mgmt’s 1Q gross margin forecast, which is more about mgmt positioning cadence of 1H (added 1Q markdowns would hurt margins, but also drive lower end-of-qtr inventories, lead to better 2Q margin)