Two days before its second-quarter earnings report, lululemon athletica inc. (NASDAQ: LULU) was hit this morning with a steep price-target cut. RBC slashed its price target on LULU from $47 to $30, noting "a 200 basis-point increase in our cost of equity assumption." The analysts tempered their bearish note by reiterating an Outperform rating on the shares.
The brokerage firm's downwardly revised target represents a 64% premium to the stock's closing price Monday. By contrast, the average 12-month price target on LULU is $39.72, according to Thomson Financial. This consensus estimate is 117% higher than yesterday's close, which seems to indicate that further price-target cuts could be in the offing, particularly if second-quarter earnings fail to impress.
During the past four quarters, First Call reports that lululemon has met or exceeded analysts' per-share profit expectations every time. However, it's safe to say that nobody on Wall Street was particularly impressed by LULU's last quarterly earnings report. Since the company announced inline earnings of 12 cents per share on June 2, its shares have shed 43% of their value. Even more compelling, institutional investors have reduced their stake in LULU by a net total of 5% since last quarter.
LULU's upcoming report is scheduled for this Thursday, September 11, ahead of the opening bell. Analysts surveyed by First Call are expecting a profit of 13 cents per share, on average, compared to the athletic apparel firm's year-ago profit of 7 cents per share. lululemon managed to double its first-quarter earnings year-over-year, but can it repeat that success?
Analysts are on the fence, with Zacks reporting 3 "strong buys" and 3 "holds." However, option players are displaying a bullish bias. During the past 10 days, traders on the International Securities Exchange have bought to open 5.13 calls on LULU for every 1 put. This call/put ratio ranks higher than about 90% of other such readings in the past year, indicating a distinctly optimistic slant among speculative investors.
Peak call open interest for September lies as far north as the 30 strike, which suggests that call players have similar expectations to the analysts at RBC. There are 16,105 contracts in residence here; by contrast, the second most-popular strike is the September 20, with fewer than 10,000 open positions.
So, there's plenty of optimism that could unwind in the form of selling pressure if LULU fails to impress. But the sentiment here isn't one-sided as lululemon boasts a massive amount of short interest. Specifically, 76% of the stock's float has been sold short, which translates to 11.2 times the equity's average daily volume. If the company turns in a respectable earnings report, the resulting short-squeeze rally could be explosive.
In fact, even in the wake of today's mixed analyst note, the shares have added 1%. (In fairness, they're still trading well below resistance from their 10-week moving average, in the 22 region.) Has the stock finally found a bottom? It might be too early to call that one, though the 18 level has propped up LULU during the past couple of weeks.
However, given the diametrically opposed sentiment readings from short sellers and option players, LULU looks primed for a potential straddle play ahead of earnings. Either the bulls or the bears are bound to be disappointed this Thursday, so look out for a major unraveling of sentiment that should determine the stock's short-term direction.
Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the video series Schaeffer's Daily Q&A on SchaeffersResearch.com.
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