Lululemon Traders Say Namaste to Takeover Speculation: Options

Photographer: Benjamin Norman/Bloomberg

Athletic apparel sits on display at a Lululemon retail store in New York. Shares of Lululemon have dropped 36 percent this year, heading for the worst annual performance since 2008. Close

Athletic apparel sits on display at a Lululemon retail store in New York. Shares of... Read More

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Photographer: Benjamin Norman/Bloomberg

Athletic apparel sits on display at a Lululemon retail store in New York. Shares of Lululemon have dropped 36 percent this year, heading for the worst annual performance since 2008.

Speculation that Lululemon Athletica Inc. (LULU)’s founder wants to sell the yoga-gear retailer has options traders stretching toward calls to buy the shares.

Bullish one-month wagers on Lululemon cost the most on record relative to bearish bets, according to data compiled by Bloomberg. Traders own about the most calls relative to puts on the stock in six months, the data show, with one of the most-held contracts betting on a 20 percent jump by tomorrow.

Founder Dennis “Chip” Wilson has opposed the direction of the current board and sought to regain greater control of the company. Traders are betting Wilson’s efforts could prove fruitful after about $3 billion was wiped from Lululemon’s market value this year, making it more attractive to suitors.

“At these levels the valuation is quite compelling,” Pam Quintiliano, a New York-based retail analyst for Suntrust Robinson Humphrey Inc., said in a phone interview July 8. “It’s come down dramatically from where it’s been historically. There is a frenzy with takeover rumors.”

While Wilson stepped down as non-executive chairman of the Lululemon board in December 2013 amid public relations controversies, his 28 percent stake remains the largest in the company. Advisers to Wilson have screened several private-equity firms, including Leonard Green & Partners, the Wall Street Journal reported on July 3, citing sources familiar with the situation.

Shares of Lululemon have dropped 36 percent this year, heading for the worst annual performance since 2008. The retailer’s sales growth has stalled in the last year as increased quality checks slowed deliveries of new apparel. It’s also been forced to win shoppers back after recalling a popular yoga pant line because they were too sheer.

Slowing Growth

The stock declined to the lowest in three years last month after Lululemon cut its full-year earnings and revenue forecasts. Analysts forecast Lululemon’s earnings to decline 8 percent in its current fiscal year after growth slowed to 3 percent in the year ended in March. The company reported profit growth of at least 46 percent in fiscal 2013 and 2012.

“Chip is still the founder and he has been very actively involved until recently,” Quintiliano said. “Perhaps his noise-making will be a call to action to get people moving quicker.”

Looking Up

In recent months, analysts have cited VF Corp., the $26 billion owner of the Vans and North Face brands, as well as Adidas AG and Nike Inc. as potential buyers for Lululemon. A takeover could be valued at $50 a share, according to a May estimate from Omar Saad of International Strategy & Investment Group LLC. That would be a 33 percent premium to yesterday’s close.

Lululemon trades at 20.2 times earnings, the lowest valuation for the stock since 2009. The shares rose 0.1 percent to $37.56 yesterday.

Calls with an exercise price 10 percent above the stock cost 2 points more than puts betting on a 10 percent decline, according to one-month data compiled by Bloomberg. Bullish bets on Lululemon cost 6.9 points more than bearish ones on July 3, the most expensive level for calls relative to puts on record, the data show. On July 17, three-month bullish bets cost nearly 1.1 points more than bearish ones, an all-time high.

Open interest in Lululemon options has increased 40 percent since mid-May, with traders owning about 1.4 calls for every put. Six of the 10 most-owned options are bullish, with $45 calls expiring this month attracting the highest ownership among them.

‘Could Pop’

“The upside calls are pricing in the possibility of a jump in the stock,” Chris Rich, head options strategist at JonesTrading Institutional Services LLC in Chicago, said in an interview July 10. “People need a lot of premium for the out-of-the-money calls to sell them, indicating they think there are risks that the stock could pop.”

Alecia Pulman, a spokeswoman for Lululemon who works for Integrated Corporate Relations Inc., did not immediately respond to requests for comment on the company’s options trading.

The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options prices known as the VIX, fell 5.9 percent to 11.52 yesterday.

While Lululemon’s valuation has declined, its price-sales ratio is still the highest among specialty North American clothing retailers with market values of at least $1 billion, according to data compiled by Bloomberg. Lululemon’s price-earnings ratio is 12 percent above its 17 peers, the data show.

Lululemon is too expensive to entice offers right now, Liz Dunn, a New York-based senior consumer analyst for Macquarie Group, said in a phone interview July 8. Increasing competition, difficulty in expanding internationally and a minimal advertising budget are all obstacles to Lululemon’s ability to compete with more traditional names such as Adidas and Nike.

Skating, Surfing

A yoga supporter with a history in the skate, surf and snowboard business, Wilson founded Lululemon in 1998 as he noticed an increase in women’s participation in athletics. He served as CEO until December 2005. Wilson’s time with Lululemon could end if he opts to sell his stake in the company rather than attempt to buy it, a possible alternative reported by the Wall Street Journal.

Wilson’s extended role in Lululemon has been marked by controversy. In response to the recall of overly sheer pants, Wilson said in an interview on Bloomberg Television that some women’s bodies don’t work with Lululemon clothing.

“If somebody wants to take a risk and buy this company and have Chip Wilson be involved, well good luck to them,” Dunn, who rates the company as neutral, said by phone. “His history with negative PR is certainly something a buyer would have to consider if he would remain involved.”

&go-ing Forward

In its first-quarter earnings report, Lululemon said that fiscal 2014 is about expansion. It points to Canada, Australia, New Zealand and the United Kingdom as its primary international markets.

On March 18, Lululemon released its &go line. The new line blends gym wear and street-friendly fashion for a clientele that’s “out the door at daybreak and moving until midnight,” according to its website. Development in men’s and girl’s fashion is also a primary focus of this year’s expansion.

“I think that they’re still thought of as the premier brand in the marketplace,” Quintiliano said. “They’re considered the innovator of the athleisure lifestyle.”

To contact the reporters on this story: Jacob Barach in New York at jbarach1@bloomberg.net; Callie Bost in New York at cbost2@bloomberg.net

To contact the editors responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net Michael P. Regan

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