Lululemon’s Earnings Outlook Raises Concerns Among Investors

Lululemon’s Earnings Outlook Raises Concerns Among Investors

Lululemon, known for its remarkable stock performance, hits a new 52-week high, yet some bears are targeting the popular athletic apparel company. Insider selling and cautious analyst sentiments suggest potential downsides, prompting investors to explore protective options.

Bearish Signals Emerge

Despite Lululemon’s recent successes, insiders, including Chief Product Officer Michelle Sun Choe, have been offloading shares, signaling a potential shift in confidence. Analysts, too, are expressing reservations, contributing to a surge in bearish options activity, with $390 puts emerging as a popular choice.

Options Indicate Concern

The options market reflects growing apprehension, with a notable open interest in $390 puts expiring just after the upcoming earnings announcement. This suggests a substantial portion of the market anticipates a 16.4% decline in Lululemon stock by December 8th, emphasizing the perceived risks.

Valuation and Caution

While Lululemon boasts strategic expansions, such as its deal with Peloton and inclusion in the S&P 500, cautionary signals persist. The company’s PEG ratio, double the industry average, indicates potential overvaluation. Analysts, forecasting earnings growth in line with the industry, are hesitant, setting a consensus price target with a modest 4.0% downside.

Proactive Measures Advised

Investors are urged to consider proactive measures given the potential risks. Despite Lululemon’s industry-leading ROIC, its premium valuation raises concerns. Comparisons with other companies, like Ralph Lauren, underscore the need for a cautious approach. While not advocating abandoning Lululemon, the suggestion is to hedge investments, potentially through purchasing protective puts.

A Word on Alternatives

While Ralph Lauren may be perceived as a safer bet with a lower PEG ratio, the emphasis is not on abandoning Lululemon but on prudently safeguarding investments. Investors are reminded to assess risk and explore protective options, such as $390 puts, to mitigate potential downsides.

In a market where uncertainties loom, considering protective measures like options becomes a prudent strategy. As Lululemon approaches its earnings announcement, investors face a pivotal moment, and careful consideration is key to navigating the current landscape.