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After today's close, lifestyle apparel and footwear retailer Lululemon (LULU) reports its Q4 2024 results. The tariff wars continue to heat up, and investors worry about businesses that import significant inventory outside the U.S.
Undoubtedly, there are two camps here. Those who believe you should wait until the cat is out of the bag and results are public knowledge, and those who think it’s better to strike before the results are out to generate a quick gain from positive or negative results.
I don't know what kind of numbers the Vancouver-based company will put up, but it remains one of the better global apparel brands in the long run. You can use the near-term volatility to your advantage if you are a risk-tolerant, income-focused investor.
As I write this before the markets open, I’ll use yesterday’s unusual options activity to guide my play. However, by the time I finish, prices will have changed, perhaps considerably, so you will need to consider these new prices when you ponder my suggestion.
What Say the Analysts?
According to MarketWatch, 36 analysts cover LULU stock, with 20 rating it a Buy (56%, about the S&P 500 average, maybe slightly higher) with a median 12-month target price of $420, 25% higher than Wednesday’s closing price of $337.79.
I’ve followed Lululemon for many years so it's unsurprising that five analysts rate it as a Sell despite the decent target price. It's been this way ever since it went public in July 2007. People just don't want to believe its products continue to be popular with consumers. It is what it is.
Barron’s says it best in their pre-earnings commentary, “Lululemon Earnings Are Coming. Guidance Matters Most.” Ain’t that the truth?
Analysts see the company generating Q4 2024 earnings per share of $5.85 on $3.58 billion in revenue. The street’s top line estimate is at the high end of the company’s updated January guidance; the bottom line estimate is also at the high end of the company’s guidance in January, which upped its numbers for the quarter from its previous outlook.
“Products continue to resonate with consumers, helping drive the better results, and guidance for strong margin expansion (vs. the prior guidance for gross margin contraction) indicates that the stronger sales did not come at the expense of margin,’” Barron’s reported comments from Dana Telsey, CEO of Telsey Advisory Group in a note to clients.
The big thing for investors to consider is what the start of the year means for Lululemon’s business over the remainder of fiscal 2025 (January year-end). Unless you’ve been living in a cave, Donald Trump has been a one-man wrecking crew to the global economic order since taking office on January 20. The uncertainty has killed the Trump bump that emerged post-election in November.
I’m sure the conference call will see the word “tariff” used often. The over and under is 100. I’m just making that up, but online betting has every other prop under the sun. Why not stock coverage?
The Barron's article mentions LULU permabear Randall Konik’s comments that the company’s foot traffic, compared to competitors such as Alo Yoga and Vuori, is much slower, suggesting it is losing market share.
First, that makes sense since Lulu’s been around since 1998, nine years before Alo Yoga and 17 years before Vuori. It's bound to have more mature traffic counts. Further, it’s beaten off Nike (NKE), Under Armour (UA), and Athleta. I don’t see it having a problem continuing to meet or exceed its competition.
But I will say this, its valuation is much more reasonable than it’s been in a long time, so aggressive investors shouldn’t worry if conservative guidance knocks the shares down in Friday trading.
In the long term, LULU remains an outstanding stock to own, so adding on the dips, like the one we’re currently in--the shares are down 34% from their five-year high in December 2023--will be a winning move five years hence.
What Play Does LULU’s Unusual Options Activity Give Us?
Yesterday, there were 1,726 unusually active options, which are defined as expiring in seven days or more and having a Vol/OI ratio of 1.24 or higher. LULU had three, all of them puts.
If you’re bullish about the company and stock over the next 3-5 years, the first two could be used as downside protection in the very near term, post-earnings. Of the two, I’d probably buy the $290 strike because it has a lower ask price of $2.91, or less than 1% of its stock price.
I’m assuming you already own the stock. If you don’t, the Jan. 15/2027 $200 strike is an intriguing possibility. While I don’t think it will happen, we could hit a tariff-induced global recession, Lululemon’s business would suffer, earnings would fall, and its share price would respond in kind.
You play the game; you know the risks.
However, it hasn’t traded at $200 since the March 2020 correction, where everything became cheaper than cheap. So, the odds are low, but you sell the put for $11.05 premium, an annual return of 3.2%. You’re not going to get rich off of it, which means an income-focused investor probably isn’t nearly as interested, but it provides a good potential entry point 21 months from now if things get messy for a bit.
Ok, to extend the idea, if you already own LULU stock, you do a covered call, opting to sell a call deep OTM (out of the money). Combined with a cash-secured put, it sets up the Covered Strangle or Covered Combination.
In this case, you need to find a strike price for a call expiring on the same day as the put, Jan. 15/2027. I get eight strike prices ranging from 25.99% ITM (in the money) to 83.55% OTM.
So, by selling the call furthest out of the money, you’re generating a 50.3% annual return, with an OTM probability of 88.79%, suggesting you won’t have to sell your stock.
But in the end, if you’ve owned LULU for a while, you’re likely already sitting on gains. Another 89% might be a good time to exit your position.
I’ve been searching for a covered strangle that had the right combination of upside and downside. I think I’ve found it.
