Lululemon (LULU)reported mixed Q1 2024 earnings Wednesday after the close. While I’m not willing to go short on one of Canada’s greatest retail success stories, yesterday’s unusual options activity suggests that some money can be made in the near term on weakness in its share price.
As I write this at Thursday’s open, LULU stock is up 4.5%, down from pre-market gains approaching 10%. I wouldn’t be surprised if it finished in negative territory by the end of the day.
Long term, I believe LULU will get its Americas business straightened away, and continue to grow overseas. I’m bullish about its prospects over the next 3-5 years.
However, this bear put spread appears to be an interesting bet. Here’s why.
Lululemon’s Got a Problem in the Americas
In the first quarter, Lulu’s America’s net revenue increased by 3% over Q1 2023, to $1.62 billion, accounting for 73.4% of its $2.21 billion in revenue. Excluding currency, the region’s revenue increased by 4% year-over-year. At the same time, its same-store sales were flat compared to a year ago. In terms of profits, its operating income in the region was $564.8 million, 2.8% less than a year ago.
Broken down by country, its U.S. revenue, excluding currency, increased by 2%, accounting for 83% of revenue in the Americas, while Canada saw revenues increase by 12% in the first quarter.
CEO Calvin McDonald discussed the U.S. weakness in the analyst call.
“Our market share gains were strong in men's in Quarter 1, and with unaided brand awareness of less than 20% in the U.S., our opportunity to continue to grow this business remains significant,” McDonald stated.
“When looking at women's, we did not maximize the business in the U.S., which was the result of several missed opportunities including a color palette and our core assortment, particularly in leggings that was too narrow.”
Interestingly, because I’m based in Canada, and LULU is known by most consumers here, it seems strange to read about the lack of brand awareness south of the border. However, McDonald pointed out in the conference call that its unaided brand awareness remained in the low 30s, suggesting the glass is more than half full.
So, the U.S. is a concern, but one that can be overcome with appropriate real estate selection and better inventory allocation.
It’s not time to ring the alarm bells just yet.
The Trend Is Not Your Friend
LULU stock is down 36% in 2024. It is in full bear mode. Yet, 19 out of 26 analysts still rate it a Buy (4.23 out of 5), with a $435.42 target price, 37% above its current share price.
I suspect we’ll see some downgrades, or at the very least, analysts' cuts in target price, over the next week. I could see $300 support tested in the weeks ahead.
Having followed LULU for many years, the one thing I do know is that it is prone to corrections. Since the beginning of 2020, there have been at least four or five quick corrections (30-90 days or so), falling by 20-30% or more for each. The most recent was in March, when its share price dropped from $478.84 on March 21 to $334.76 on April 15.
I do think bullish investors looking for a better entry point will get one over the summer and into the fall, which brings me to yesterday’s unusual options activity.
The Bear Put Spread Play
There were three puts and 10 calls (DTEs of 8 days or more) with Vol/OI ratios of 1.25x or higher on Wednesday. None of the calls caught my interest. However, the three puts have me thinking about a bull put spread.
“To use this strategy, you buy one put option while simultaneously selling another, which can potentially give you profit, but with reduced risk and less capital,” states Fidelity’s website.
The key is to buy a put with a strike price below its current share price while also selling a put with a strike even further below the current share price.
Here are the three put options from yesterday.
In this case, you would buy the June 14 $280 put, with eight days to expiration, and sell the June 14 $250 put, also expiring in eight days.
The $280 put you buy costs $680, while the $250 put you sell generates $121 in income, for a net cost of $559.
Using Fidelity’s example to determine your potential maximum reward, subtract the net debit ($6.80-$1.21 = $5.59 x 100 = $559) from the difference in strike prices ($280-$250 = $30 x 100 = $3,000). In this example, it will be $2,441 ($3,000 – $559).
The real negative aspect of this bull put spread is its short expiration date (8). That doesn’t give you much time to see its share price fall below $280.
As I write this, the prices for both these puts have all but dried up as has the volume, making the trade a moot point anyway.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
