Will Lululemon Perform With A New CEO?

With shares of Lululemon (NASDAQ:LULU) trading around $64, is LULU an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Lululemon designs, manufactures, and distributes athletic apparel and accessories for women, men, and female youth. It operates in three segments: Corporate-Owned Stores, Direct To Consumer, and Other. The company’’s line of apparel include fitness pants, shorts, tops, and jackets for healthy lifestyle activities, such as yoga, running, and general fitness. Its fitness-related accessories comprise bags, socks, underwear, yoga mats, instructional yoga DVDs, and water bottles.

Lululemon Chairman Dennis Wilson is being accused of insider trading after it was revealed that he sold $50 million in Lululemon stock before Chief Executive Officer Christine Day announced that she would be stepping down. The unexpected retirement announcement has caused some turmoil in the stock. The athletic and fitness movement seems to be in full swing so companies like Lululemon stand to see rising demand. As consumers continue to shop for upscale athletic apparel and related products, look for Lululemon to see rising profits.

T = Technicals on the Stock Chart are Mixed

Lululemon stock has struggled to see higher prices over the last couple of years. The stock is now trading at the low part of a range extending back several months. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Lululemon is trading below its key averages which signal neutral price action in the near-term.

LULU

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Lululemon options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Lululemon Options

39.17%

6%

5%

What does this mean? This means that investors or traders are buying a very minimal amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

July Options

Steep

Average

August Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very minimal amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Lululemon’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Lululemon look like and more importantly, how did the markets like these numbers?

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

0.00%

48.21%

44.44%

50.00%

Revenue Growth (Y-O-Y)

21.03%

30.68%

37.50%

33.12%

Earnings Reaction

-17.53%

1.28%

7.26%

12.44%

Lululemon has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have expected a little more from Lululemon’s recent earnings announcement.

P = Weak Relative Performance Versus Peers and Sector

How has Lululemon stock done relative to its peers, Nike (NYSE:NKE), Under Armour (NYSE:UA), Gap (NYSE:GPS), and sector?

Lululemon

Nike

Under Armour

Gap

Sector

Year-to-Date Return

-15.28%

21.82%

24.50%

38.34%

18.82%

Lululemon has been a weak relative performer, year-to-date.

Conclusion

Lululemon provides highly-demanded athletic apparel to consumers across the nation. Recent news that the existing CEO is retiring has investors in the company worried. The stock has struggled over the last few years and is now near the low-end of trading range. Over the last four quarters, earnings and revenue figures have been on the rise; however, investors have expected a little more from the company’s most recent earnings announcement. Relative to its peers and sector, Lululemon has been a weak year-to-date performer. WAIT AND SEE what Lululemon does in coming quarters.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.