According to Barchart.com analyst data, two analysts out of 25 consider Lululemon (LULU) a Moderate Sell or Strong Sell. And while I admire the analysts’ moxie, putting a sell rating on one of the world’s most popular apparel brands, the latest news solidifies why you want to own LULU for the long haul.
The company reported Q1 2023 results yesterday after the markets closed. Surprise, surprise, its results were outstanding. LULU is up more than 12% in late Friday morning trading. It continues to underpromise and overdeliver. I would not be surprised if LULU stock hits $400 before too long. Its business is performing too well.
Usually, on Friday, I write about three stocks with unusual options activity. However, yesterday’s strong performance has me going all-in on Lululemon. So here’s why you should look closely at its unusual options activity.
China Awakens
Lululemon had 119 stores in China as of the end of April, the second-most in its global retail footprint and almost double those in Canada, where it started in 1998. China’s been downtrodden for the better part of the past couple of years due to Covid. However, the first quarter results suggest the Chinese consumer is returning to LULU stores nationwide.
The company’s revenue in China jumped 79% in the quarter to $249.7 million. While that’s a big jump, that works out to an average of $2.09 million per store. Canada’s average is $3.67 million, while it’s $3.68 million in the U.S.
Remember that the company doesn’t break down each country’s brick-and-mortar and e-commerce revenue. I’m merely using this example to illustrate that China’s got much more growth to come before it returns to rivaling Canada and the U.S.
Further, Lulu’s revenue outside the U.S. and Canada in fiscal 2019 (February 2020 year-end) was $476 million. That included revenue from 38 stores in China. The average of 123 stores outside North America was $3.87 million … for the entire year. So, the numbers it's generating in China are still reasonably tepid compared to the potential.
Also, CFO Meghan Frank said in its Q1 2023 conference call that it would open 30-35 stores outside North America in 2023, most of those in China. That, too, will help its China business over the next three quarters of its fiscal year.
That’s excellent news if you are thinking about buying its stock.
Guidance Remains Conservative
In the company’s Q4 2022 conference call, its guidance called for revenue of $1.91 billion at the midpoint of its guidance, with adjusted earnings per share of $1.97. Its revenue in the first quarter was $2.0 billion, $90 million better than its guidance, with EPS of $2.28, 16% higher than its March projections.
As for the analysts, it beat the revenue consensus by $70 million and the EPS estimate by 30 cents.
“Our Q1 results were strong as guests responded well to our product offering in all our markets across the globe. In addition, a meaningful acceleration in our China sales trend, coupled with lower air freight, contributed to our better than planned financial performance. We are pleased with our momentum heading into the second quarter and for the full year as reflected in our revised outlook for FY23,” Frank stated in its press release.
So, for Q2 2023, it expects top-line revenue of at least $2.14 billion, with at least $2.47 a share in earnings. That would be 14% year-over-year growth. On the bottom line, it’s projecting 12% EPS growth over last year.
Both growth rates are considerably lower than what it delivered in the first quarter. However, I find it hard to believe that its business will suddenly decelerate when there are few signs its customer base’s spending is slowing. In addition, the China effect should balance out any weakness in North America.
For the full year, Lululemon’s guidance calls for 17% revenue growth and 18% EPS growth to $11.84 a share at the midpoint. These, too, could prove to be very conservative. However, Frank did say it continues “to be mindful of the uncertainties in the macro environment, and as a result, we remain prudent as it relates to planning the business.”
CEO Calvin McDonald continues to do an impeccable job driving Lululemon’s business. He’s assembled a first-rate management team that is talented and confident while understanding that it can all turn on a dime.
As an aside, my mother-in-law (in her 70s) bought a pair of Lulu running shoes, which she absolutely loves.
Its Unusual Options Activity
As I write this, Lululemon’s share volume is more than 3x its average 30-day volume. Likewise, its options volume is about 5x its 30-day average. That’s pretty impressive for a Friday.
Its options volume on Thursday was 112,094. Today, it’s 28,000 higher with 2-3 hours left in the trading day. That’s also healthy.
As for unusual options activity, it’s got a whole bunch -- expiring in seven days or later -- with volumes of at least 1.25x the open interest.
If you’re looking for a put to sell, I like the July 7 $375 strike. Its Vol/OI is 35.0x with a bid price of $14.75. If the put takes off, you’ll get an annualized yield of 40% on your premium income. If it doesn’t go anywhere, you’ll pay a net price of $360.25.
Long-term, you ought to be happy with a $360 entry point.
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.
