Look out below. Lululemon (LULU) is crashing.
It’s Friday, the jobs report is out, and it wasn’t good, sending investors into a full-blown tizzy. As I write this, in the first half hour of trading, the S&P 500 is down 1.33%. You can find little black on the board now.
The good news is that the index’s futures were down 1.8% in pre-market, so maybe investors have concluded adding jobs, even if it’s only 114,000, is better than shedding them.
Who knows? I’m not an economist.
Anyway, I thought I’d focus on a stock that’s been absolutely hammered in 2024, down 53% year-to-date, with more expected today. It’s down 4.5%. If you own LULU, fasten your seat belts. Volume ought to be high despite this being a Friday in summer.
It would be fair to say LULU is a good definition of a falling knife. It’s down 54% from its December 2023 all-time high of $516.39. And more bloodletting is on the way.
On Fridays, I discuss unusual options activity. Because I’m a believer in Lululemon’s business, I thought I’d consider some of the specialty retailer’s unusual options from Thursday.
Alas, with a fast-moving market like today, anything from yesterday will change considerably today. I’ll take that into account when discussing the five put options that were unusually active from yesterday’s trading.
Have an excellent weekend!
How Did We Get Here?
The last time LULU had this kind of correction was in late 2021 into mid-2022. Between its Nov. 16 high of $485.83 and July 1 low of $261.03, it fell 46% over seven months. The duration of this latest correction is very similar to the one in 2022.
There are two questions to consider.
1) Why did it fall so much in 2022?
In January 2022, the company announced its Q4 2021 results would be less than its previous guidance due to the omicron coronavirus impeding its operations. The fourth quarter is the company's busiest, and sales were expected to hit near the bottom of its range, around $2.13 billion. As a result, its adjusted EPS would be at the low end of its guidance, around $3.25.
The interesting thing is that a big chunk of its correction came before it announced the bad news of Jan. 10. When it finally announced Q4 2021 results in March, revenues were right at $2.13 billion, while adjusted EPS was five cents higher than the high-end of its guidance.
The shares had a brief bounce after March 21, the day the news was announced, but had another leg down in April and May on supply chain concerns. Despite reporting healthy results in 2022, the stock continued to struggle to maintain an upward trajectory.
It began its latest leg up in March 2023 and ended in November 2023. It’s been downhill ever since.
2) Why is it falling so much in 2024?
There is no question that the economy is slowing, and with that, Lululemon’s sales. The company’s same-store sales were up single digits (7% excluding currency) in Q1 2024, less than half the 16% growth a year earlier.
Part of the problem is that consumers are being very discretionary about their discretionary spending. The other part is that the competition continues to heat up, whether we’re talking about its core products or footwear. Lululemon can handle the challenge, but investors have become more conservative in their commitment to the stock. It happens.
Good companies bounce back. I have no doubt CEO Calvin McDonald will make the necessary moves to keep the business growing.
Example: It launched its Breezethrough leggings on July 9. By the end of July, it pulled the leggings because of consumer unhappiness. Apparently, there is a V-shaped back seam that makes your butt look too long.
It isn't the first product snafu, and it won’t be the last. The company did the right thing and went back to the drawing board. When relaunched, I’m confident they’ll be a hit.
The fact is, it is the U.S. market that’s not pulling its weight. McDonald admitted as much in the Q1 conference call. The rest of its markets continue to grow at a double-digit pace.
How Can You Profit From This Situation?
As I said in the intro, there were five put options that were unusually active in Thursday trading. See below.
Of those five, two expire in 14 days, two in 169 days, and one in 141 days. I’ll consider the two with the highest DTE and work my way back.
The two at 169 days expire on Jan. 17/2025 and have strikes of $400 and $410. The Vol/OI ratio of the former is 7.08 as I write this, while the $41o is 7.68. Both haven’t traded today.
If you were to sell the $400 put, the bid right now is $151.80, while the bid for the $410 is $162.50. Neither makes much sense if it continues to move lower. And, if you’re bullish on LULU and bought at current prices, these don’t make sense as protective puts.
After thinking about it, I’m going to move right to the 14-day DTEs and skip the 141-day expiry because it’s basically the same thing as the 169-day DTEs.
So, we have $300 and $290 strikes expiring in 14 days. The ask prices are $64.60 and $53.25, respectively.
If you buy 100 shares at $237.41 and buy 1 $300 put, your overall cost is $302.01, or $30,201. However, if the share price falls to $200 in the next two weeks, you would be $35.40 in the money on the put, reducing your net outlay to $201 [$23,741 (cost of shares) less $3,540 profit on the put] even though the shares have fallen by 16%.
That’s a potentially interesting protective put if you’re bullish on Lululemon and think the knife has fallen too far.
The $290 put is even better. Your net outlay for it is $66 [$23,741 (cost of shares) less $3,675 profit on the put].
It all sounds too easy. And it is. If the shares move above the strike price over the next two weeks, your profits on your stock are eaten up by the cost of your put protection.
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.
