Lululemon Athletica (Nasdaq: LULU, $64.06), the oddly named Vancouver-based purveyor of “yoga-inspired” athletic apparel, is scheduled to report earnings before the open of Thursday’s session.
Shares don’t have investors breaking a sweat – the stock is up nearly 15% thus far in 2015. The stock has traded in a 52-week range of $36.26-$68.99, having clocked its low in June of last year and shares up are over 75% off the lows.
Expectations for the quarter are high, and the mid-cap retailer has begun to face increased competition from other retailers like The Gap (NYSE: GPS, $43.17), Nike (NYSE: NKE, $101.55), and Under Armour (NYSE: UA, $81.39). Following founder Chip Wilson’s departure after a series of controversial remarks, the Board stated earnings would be “back on track,” but analysts have cautioned investors to expect “more moderate” growth going forward.
Analysts are projecting EPS of $0.73 on $598.68 million in revenue, compared with actual EPS of $0.72 on $520.99 million in revenue one-year prior. Recently, the stock has performed well on earnings, moving higher 3 of the past 4 quarters. However, the stock has only rallied on 4 of the past 8 earnings announcements, moving just over 10% on average.
The Mar Weekly (3/27) LULU 64 Straddle is about $5.25, thus implying a below average move of 8.2%.
My Trade
- Buy the Mar Weekly 3/27 60-59 Bear Put Spread for $0.25
- Risk: $25 per 1 Lot
- Reward: $75 per 1 Lot
- Break-even stock price at expiration: $59.75
Given its recent strong performance, I feel expectations for the report are high enough that reality can only disappoint investors.
I like this bear put spread because the downside strike is aligned with the measured-move target implied by the straddle. The trade also offers a favorable risk-reward setup, paying 3:1 on my risk capital.
#####
To learn more about KeeneOnTheMarket, please click here.
