In the 15 years since its 2007 IPO, Lululemon Athletica, Inc. (LULU) has largely held its position as a premium leader in the athleisure market, although it has had some controversial moments, including the 2013 “sheer pants” debacle when some customers complained that the pants were see-through. Eventually, the company solved that problem and has grown about 7.5x since then. However, the stock price has plummeted since its all-time high in late 2023, dropping more than 60%, and the “sheer pants” issue has only recently returned. Sales of the “Get Low” series have been suspended, and the company has faced growing criticism from founder Chip Wilson, who is seeking to reorganize the company’s board of directors. There is no question that the company needs to address this issue decisively. Lulu is considered a premium brand and prices its apparel accordingly. To maintain its position in the face of new competition from companies like privately held Vuori, it needs to maintain customer trust and regain investor confidence. Consensus for the fourth quarter of 2025 is for net revenue to be approximately $3.58 billion and adjusted earnings per share to be approximately $4.79, reflecting declines of approximately 1% and 22%, respectively, from the prior year. However, next year’s forecast is for growth to return to a modest 4.5%, free cash flow to increase by about 5% to just over $1.2 billion, and free cash flow yield to exceed 5%. Stagnant growth Alternative data provides insight into how and why Lululemon’s once robust growth has stalled. Placer.ai estimates store foot traffic is down 14.6% year-over-year, and its year-end sales/transaction estimates suggest a steeper decline than the industry as a whole, according to Bloomberg data. However, 15 times forward earnings means that a lot of bad news is priced in. The sometimes controversial activism of founder Chip Wilson may help. And he has plenty of motivation to turn things around. Wilson and his wife, Shannon, own about 4.5 million shares through a holding company, worth about $850 million at the latest closing price. Activist investor Elliott Management is reportedly proposing to buy more than $1 billion in stock and bring in Jane Nielsen, the former chief financial officer and then chief operating officer of consistently strong Ralph Lauren (RL). Uncertainty will keep option prices elevated, but coupled with weak stock prices, LULU could start to stabilize at its current price. That’s about the same price as the stock was in mid-2019, when earnings were less than a third of what they are now. My research suggests that cash-backed puts, buy-writes, or call spread risk reversals (medium to moderately bullish bets that are net short option premiums) are good ways to start scaling up positions. Disclosure: None. All opinions expressed by CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, its parent or affiliates, and may have been previously disseminated on television, radio, the Internet, or another medium. The above is subject to our Terms of Use and Privacy Policy. This content is provided for informational purposes only and does not constitute financial, investment, tax, or legal advice or a recommendation to purchase any securities or other financial assets. The Content is general in nature and does not reflect any individual’s unique personal circumstances. The above may not be appropriate for your particular situation. Before making any financial decisions, you should strongly consider seeking the advice of your own financial or investment advisor. Click here for full disclaimer.
