LULU Stock: Options Traders Issue Warnings on Value

American Analyst Ratings for January 4th 2024

Lululemon (LULU:NSD) the popular brand of athletic leisurewear, is currently facing a crucial moment in its journey. While it was previously enjoying a surge in popularity due to changing workplace fashion trends caused by the COVID-19 pandemic, LULU’s stock is now facing uncertainty. Moreover, institutional investors are expressing caution. In this article, we will examine the changing dynamics and get insights from options traders to gain a better understanding of what we can expect in the Lululemon stock forecast.

 

LULU Stock’s Fluctuating Market Trends:

In the wake of the COVID-19 pandemic, a relaxed approach to office attire was the trend, significantly benefiting Lululemon. Business suits took a backseat, and casual wear surged. However, the tide has turned, and LULU stock no longer enjoys the same favor, causing concerns among shareholders.

Major corporations are leading the charge to bring back formal dress codes for employees. Amazon’s return-to-office mandate serves as a prime example, with other companies determined to follow suit. Moreover, Federal Reserve Chair Jerome Powell’s warning about high inflation raises the possibility of increased interest rates, potentially hampering business growth. This could lead to layoffs and push workers back into traditional office settings, creating a double challenge for LULU stock.

While most analysts remain optimistic about Lululemon, Bernstein’s Aneesha Sherman holds a “Hold” rating. However, that’s not the only source of concern for LULU stock, as options traders appear wary.

 

Options Traders Predict Lululemon’s Downside:

Monitoring the options market, where institutional investors often operate, provides valuable insights. These professionals have access to information that retail investors do not. For LULU stock, a significant concern arises from the options flow screener, which shows no major bullish activity for 2024 and early 2025, following the expiration of $420 calls on October 20, 2023.

Traders have shown a preference for bearish sentiment, purchasing $300 puts expiring on June 21, 2024, and $280 puts with a January 17, 2025 expiration. Additionally, the volatility smile, depicting implied volatility (IV) at various strike prices, reveals a concerning pattern. IV remains subdued at strike prices close to the market price but spikes significantly lower. This indicates options traders are hedging against tail risks, which doesn’t bode well for LULU stock.

 

Financials Present a Mixed Picture:

Despite these concerns, Lululemon’s financial performance remains strong. The second-quarter earnings report showcased both top and bottom-line growth, particularly driven by international expansion, notably in China. The company also benefits from economies of scale due to its robust business expansion initiatives.

However, the uncertainty surrounding shifts in attire trends and the cautious stance of professional traders in the derivatives market cast shadows over the optimistic financial performance.

 

LULU Stock Forecast:

Based on the consensus of 24 analysts, the average target price for LULU stock is $422.84 for the next 12 months, with an average rating of “Strong Buy.” Stock Target Advisor’s analysis also leans towards a bullish outlook, considering 10 positive signals against 4 negative signals. At the last closing, LULU’s stock price was $388.12, having fluctuated -3.41% over the past week, +1.83% over the past month, and +10.03% over the last year.

LULU Ratings by Stock Target Advisor

Conclusion:

While Lululemon continues to deliver strong financial results, the evolving consumer economy presents significant challenges. Whether due to a return to traditional office attire or economic uncertainties, the athletic apparel retailer may no longer rely on previous growth catalysts. With options traders displaying a guarded stance, investors would be wise to approach LULU stock with a degree of skepticism.

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