Lululemon Athletica, Inc.’s shares were downgraded to “Sell” by analysts at Jefferies on expectations that the yoga-themed retailer would pull back on aggressive long-term guidance in the coming quarters.
Lead analyst Randal Konik noted that Lululemon’s second-quarter results, due this Thursday, “should be strong,” helped in part by the popularity of the belt bag craze. He also suspects Lululemon’s outlook for the current year will be reiterated. However, Konik believes Lululemon’s recent performance is priced into the stock, and the downgrade reflects concerns over whether the retailer can reach aggressive long-term goals across total revenues, EBIT margins, men’s, and international set at its Investor Day in April 2022.
Konik wrote: “Inventories are bloated across retail (LULU included), promos are rising industry-wide, FX is not helping, and inflation isn’t going away. We are seeing more evidence of slowing spend across apparel and general merchandise. More importantly, we are witnessing slowing spending trends across low- and high-income demos broadly.”
According to Konik, international growth aspirations will be challenged by the downtrend in China in recent months due to pandemic-related lockdowns and inflationary and macroeconomic challenges facing Europe.
In announcing its five-year plan, Lululemon said it was on track to quadruple its international revenue relative to 2018 in 2022 and planned to quadruple international revenues between 2021 by 2026 again. The gains are expected to be driven by China.
Konik wrote, “It’s clear macro issues are more severe across Europe and in Asia than in the U.S., which could pressure LULU’s ability to meet lofty projections.”
Konik believes Luluemon’s margin goals are “also unrealistic.”
Lululemon’s five-year margin targets were based on expectations that promotions would remain low.
The analyst wrote, “Those projections are on top of already peak margins while industry-wide apparel sales are slowing, promos are rising to move record-high inventory levels. Given the implied ‘Laws of Retail,’ it would be beyond heroic for LULU to increase, let alone maintain, its sky-high margins.”
Lululemon’s inventories were up 74 percent year-over-year at the close of the first quarter.
In men’s business, Konik noted that while the category is experiencing healthy growth, the “competition isn’t standing still,” and subpar brand awareness among men will likely impede the next level of growth. Konik wrote, “While there is significant room to grow brand awareness among men, we believe it will be a tall task to double the men’s business in five years due to LULU’s premium-priced products and the brand’s strong association with yoga and women.”
Finally, Konik expressed concerns about the risks Lululemon faces tackling major new categories, including footwear and at-home fitness, with its Mirror acquisition and not paying enough attention to protect its positioning in its core apparel categories, including leggings. The analyst wrote, “We’ve seen great brands falter before (e.g., Gap, Victoria’s Secret, Abercrombie, Under Armour) and see a similar pattern unfolding at LULU.”
Jefferies has a price target of $200. Lululemon is currently trading at around $310.
Photo courtesy LULU
