Can Lululemon Break Out to New Highs This Year?

With shares of Lululemon (NASDAQ:LULU) trading around $75, 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.

Recently, Lululemon posted earnings and revenues figures that beat Wall Street’s expectations. Christine Day, Lululemon’s CEO, said in a statement: “2013 continues to be the most important and most productive year in Lululemon’s history. We have not only worked our way back from the black luon setback, but have also added very talented people in important functions and have taken major steps forward on a number of key fronts, including the expansion of our international and men’s businesses and many logistical initiatives. In addition, our exclusive partnership with Noble announced today and additional sources for luon will help to ensure that Lululemon remains a distinct leader in quality and innovation.”

T = Technicals on the Stock Chart Are Strong

Lululemon stock has struggled to make significant progress in the past couple of years. The stock is trading near the top end of a two-year range, so it may need to spend some time there. 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 above its rising key averages, which signals neutral to bullish price action in the near term.

LULU

Source: Thinkorswim

Taking a look at the implied volatility 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

32.56%

40%

39%

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

Put IV Skew

Call IV Skew

October Options

Flat

Average

November Options

Flat

Average

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

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 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

0.00%

0.00%

48.21%

44.44%

Revenue Growth (Y-O-Y)

21.89%

21.03%

30.68%

37.50%

Earnings Reaction

-5.40%

-17.53%

1.28%

7.26%

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

P = Weak Relative Performance Versus Peers and Sector

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

Lululemon

Nike

Under Armour

Gap

Sector

Year-to-Date Return

-2.09%

39.67%

70.20%

31.64%

33.42%

Lululemon has been a poor relative performer, year to date.

Conclusion

Lululemon provides in-demand athletic apparel to consumers across the nation. The company recently reported strong earnings and revenue numbers. However, investors had higher expectations. The stock has not made much progress in recent years and is now trading near the top end of its two-year range. Over the last four quarters, earnings and revenues have been rising, but investors have expected more during recent earnings announcements. Relative to its peers and sector, Lululemon has been a weak year-to-date performer. WAIT AND SEE what Lululemon does this quarter.

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