A lot of bad news is priced into Lululemon. Trading the athleisure giant using options
For 15 years following its 2007 IPO, Lululemon Athletica Inc. (LULU) largely stood as a premium leader in the athleisure market, though there have been a few controversial moments, including the “Sheer Pants” debacle in 2013, when some customers complained the pants were see-through. Ultimately, the company put that issue behind it and has grown about 7.5-fold since then. But the stock has foundered since the all-time highs in late 2023, falling over 60%, and then, just recently, the “Sheer Pants” issue reappeared. Sales of the “Get Low” line were suspended, and criticism from the company’s founder, Chip Wilson, who is trying to reshape the company’s board, has grown louder. There’s no question that the company needs to decisively address the issue. Lulu is viewed as a premium brand and prices its apparel accordingly. Preserving that position in the face of newer competition from companies like privately-held Vuori requires maintaining customer trust and regaining investor confidence. Fourth-quarter fiscal 2025 consensus estimates project net revenue of approximately $3.58 billion and adjusted earnings per share of roughly $4.79, reflecting year-over-year declines of roughly 1% and 22%, respectively. But expectations for the fiscal year ahead are for growth to resume to a modest 4.5% and for free cash flow to grow by about 5% to just over $1.2 billion, yielding a free cash flow yield of more than 5%. Stalled growth Alternative data offers some insight into how and why Lululemon’s once-robust growth has stalled. Placer.ai estimates store visits have declined 14.6% YoY, and observed sales/transaction estimates through year-end suggest larger declines than the industry as a whole, according to Bloomberg data. But at 15x forward earnings, quite a lot of bad news is priced in. Sometimes controversial, founder Chip Wilson’s activism may be helpful — and he has plenty of motivation to see things turn around. Through his holding company, Wilson and his wife Shannon own roughly 4.5 million shares, worth approximately $850 million at the latest closing price. Activist investor Elliott Management has reportedly taken a stake of more than $1 billion and is proposing that the company bring in Jane Nielsen, former CFO and then COO of Ralph Lauren (RL) , a company that has performed consistently well. The uncertainty has kept options prices elevated but, combined with the depressed share price, LULU may begin to stabilize at current prices — approximately where the shares were trading in mid-2019, when revenues were less than a third of what they are today. By my work, a cash-secured put, a buy-write or a call spread risk reversal — modestly to moderately bullish bets that are net short options premium — would be suitable ways to begin scaling into a position. DISCLOSURES: None. All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, or its parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
