Why Lululemon Athletica inc. (LULU) Could Hit Record Highs After Earnings

Lululemon Athletica inc. (NASDAQ:LULU) short sellers have been throwing in the towel in recent months

by Josh Selway

Published on Aug 31, 2016 at 1:56 PM
Updated on Jun 24, 2020 at 10:16 AM

Yoga apparel maker Lululemon Athletica inc. (NASDAQ:LULU) has, for the most part, performed well after past earnings releases. Going back eight quarters, LULU stock has posted positive post-earnings sessions three-quarters of the time, including gains of 4.9% and 10.7% in the past two quarters. Despite this, LULU options traders have taken an unusual interest in puts during the days leading up to the company's earnings report Thursday morning. 

For example, LULU's 10-day put/call volume ratio at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) has increased by 34% in the past week alone. The current reading of 1.64 stands in the 90th annual percentile, meaning options traders have bought to open puts over calls at an extremely rapid rate lately. Sure enough, this trend is continuing today, with puts trading at three times the intraday norm. 

However, some of these put players may not be bearish on LULU at all. Since the stock has outperformed considerably in 2016, and is sitting near three-year highs, it's likely some put buyers are actually shareholders seeking insurance ahead of earnings. 

There are plenty of LULU bears elsewhere, though, as short interest accounts for over 17% of its float. Going by average daily volumes, it would take these bears three weeks to cover their positions -- which they've been doing quite a bit in recent months. In fact, the chart below shows that short interest on LULU has been moving lower since November 2015, a trend that coincides with a sharp upturn in the stock price. Considering the amount of buying power still on the sidelines, this short-squeeze phenomenon may be far from over. 

LULU short interest August 31

Turning to analysts, 14 of 21 brokerage firms recommend buying LULU, while just two have issued a "sell" or a "strong sell" rating. While this paints a rather bullish picture, the stock's average 12-month price target among the brokerage bunch sits at a discount to current levels, at $73.21. 

Given Lululemon Athletica inc.'s (NASDAQ:LULU) impressive chart, a bullish outlook seems more fitting. The shares have steadily climbed higher in 2016, boasting a year-to-date lead of 46.4%. At $76.70, the shares have pulled back some since peaking at $81.81 a week ago, with a dismal day from sector peer Under Armour Inc (NYSE:UA) weighing this afternoon. But another strong earnings performance tomorrow morning could spark an unwinding of pessimism in and out of the options pits -- including potential price-target hikes -- which may help LULU take out its all-time high of $82.50 from back in 2013. 

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