LULU Call Options: Lululemon’s Lemon did Turn Into Lemonade After all

Lululemon Athletica (NASDAQ:LULU) is leading the pack in the market today as the stock shows one of the best rally in today’s session so far. As at 11:13AM EDT today, the shares of Lululemon Athletica Inc. were up an impressive 7.02% to $65.24. Today’s rally is an interesting development for lululemon considering the fact that the stock has channeled around its 50-day moving average for much of this month.

My last coverage of lululemon was in a December post titled “Making Lemonades Out of LULU Lemons”. I wrote that piece when shares of Lululemon trading near a $55 resistance after coming out of a round bottom pattern.

I specifically said, “the confirmation of the rounding bottom pattern would see shares of Lululemon breaking out above the $55 resistance point and we can technically say that Lululemon has a breakout above $55 when it closes above that level in three successive sessions”.

I then went ahead to give the stock a $60 price target when I said, “Lululemon confirms the rounding bottom pattern, we can expect to see the stock soaring to new 52-week highs above $60. In fact, we can expect the bullish streak to carry the stock towards its 2-year highs around $80”.

I need not repeat that Lululemon has outperformed my $60 price target as the stock trades above $65 in today’s session.

Why is LULU Up Today?

Lululemon with its market capitalization of $9.25B is a designer and retailer of technical athletic apparel operating primarily in North America and Australia. The Company’s yoga-inspired apparel is marketed under the lululemon athletica brand name.

The main reason behind the rally being recorded in Lululemon today is the impressive fourth quarter (Q4 2014) results that the company posted before the opening bell today. Highlights of fourth quarter results are presented below:

Lululemon reported Q4 EPS of $0.78 per share to beat the consensus estimate of $0.73 and to mark an increase from the EPS of $0.75 from the same quarter last year

The company’s revenue came in at $602.5M in line with the consensus’ analyst estimate. The revenue marks a 15.6% year-over-year increase from the revenue of$521.0M from same period last year

Comparable store sales for the fourth quarter increased by 5% on a constant dollar basis and direct to consumer net revenue increased 20% on a constant dollar basis.

Direct to consumer net revenue increased 17% to $114.5 million, or 19.0% of total Company net revenue, in the fourth quarter of fiscal 2014, an increase from 18.8% of total Company net revenue in the fourth quarter of fiscal 2013.

Gross profit for the quarter increased by 11% to $310.0 million, and as a percentage of net revenue gross profit was 51.5% for the quarter compared to 53.5% in the fourth quarter of fiscal 2013.

Income from operations for the quarter increased by 2% to $157.2 million, and as a percentage of net revenue was 26.1% compared to 29.6% of net revenue in the fourth quarter of fiscal 2013.

How to Trade LULU Options

Many people are pessimistic about the prospects of Lululemon going forward because of the cautious guidance that the company provided for the current quarter. Lululemon guided for revenue of $413M to $418M below the $442M consensus and EPS of $0.31 to $0.33 below $0.39 consensus.

Nonetheless, I am optimistic about the prospects of Lululemon because the cautious guidance will make it easier for the company to outperform expectations. I recommend buying the LULU Jun 2015 70.000 call (LULU150619C00070000) at an asking price of $2.60.

 

 

 

— Daily Option Alerts

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