This Analyst Is Selling Naked Lululemon Puts

• Shares of Lululemon Athletica, inc. LULU have declined 12.87 percent over the past month.
• Jim Strugger of MKM Partners has maintained a Buy rating and price target of $69 on the company.
• The stock has seen a sharp decline since the company reported its 2Q earnings on September 10.

For 2Q, the company reported revenue growth of 16 percent, year on year, which was above the consensus expectations, while EPS was mostly in-line with the consensus. Strugger believes that the pullback in the stock was due to the gross margin miss, which “exacerbates the primary concern about the company over the last several years.”

According to the MKM report, the company is expected to return to earnings growth in the mid-20s, driven by 200 bps operating margin expansion, 10 percent total comps and 19 percent square footage growth.

“The fourth quarter is likely to mark the inflection point,” the report stated, while adding that investors appear to be using the recent weakness to accumulate the stock. However, despite short interest being high, “the put/call open interest ratio is near an alltime low.”

According to Strugger, “Three-month 90% implied volatility is toward the upper end of its range over the last two years, which presents a nice opportunity to extract LULU premium.”