Needham & Co., the investment banking and asset management firm focused on growth companies and their investors, became the second investment firm this week to downgrade Lululemon on Thursday, September 25, citing dim prospects for the chain’s ability to revive its U.S. business in the near term, partly due to heightened athleisure competition.
The other downgrade came from Baird.
Needham lowered its rating on Lululemon to “Hold” from “Buy” and removed its price target. Previously, its price target was $192 per share.
On September 25, shares of LULU closed at $172.01, down $7.21, or 4.0 percent. Shares have declined by about 55 percent since the start of the year, when they were trading at $382.41.
Tom Nikic, analyst at Needham, wrote in a note, “It’s been a disappointing 18 months for LULU, and while we were optimistic that new product initiatives would revive the U.S. business in 2025, it appears that the competitive environment is simply too challenging at the moment.”
He further believes that analysts’ estimates remain “too high,” with Needham expecting a mid-single-digit EPS decline for Lululemon in FY26, while Wall Street’s consensus calls for a break-even performance.
“We see more downside risk to numbers over the next 6-to-12 months even if fundamentals don’t deteriorate any further,” added Nikic. “While we don’t think the company has done anything damaging to the brand, the operating environment is clearly very tough at the moment, and we think it’s prudent to move to the sidelines until we get evidence that they are able to ‘right the ship’ domestically.”
The analyst noted that Needham had upgraded Lululemon in January, based on expectations that its U.S. business had “turned a corner,” with flat North American comps in the fourth quarter following declines in the prior two quarters. However, the North America business has since worsened sequentially with a comp decline of 1 percent in Q125 and 3 percent in Q225.
Nikic also said Lululemon was “far more impacted” than Needham estimated by the Trump Administration’s ending of the de minimis exemption, which allowed packages valued under $800 to enter the U.S. with no import tax. Until recently, Lululemon mailed many U.S. orders from its Canadian distribution centers, taking advantage of the exemption.
Other factors contributing to the downgrade include increased competition from aggressive store openings by Alo, Vuori, Fabletics, and Athleta; the emergence of non-athletic brands such as Free People, Aerie, and Victoria’s Secret with athleisure lines; and a shift in the trend toward denim. Said Nikic, “Younger consumers have clearly gravitated to wide-leg jeans in recent years, potentially at the expense of LULU’s core product (women’s tight-fitting leggings).”
Finally, Nikic noted that Lululemon is staring down “difficult multi-year compares” after tripling North American revenues between 2017 and 2023 and may need a reset. He wrote, “While trends have been choppy of late, we shouldn’t lose sight of the fact that LULU has been one of the biggest success stories in Softlines in the past 10-15 years.”
Baird reduced its rating on Lululemon to “Neutral” from “Buy” on Tuesday, September 23, and trimmed its price target to $195 from $225 per share.
Analyst Mark Altschwager, in a note, cited a rise in the amount of marked-down merchandise at Lululemon as a sign that a turnaround is at least six months away. He added that while Lululemon is hoping the new styles arriving next spring will reignite growth, “the success of new product innovation is uncertain while competitive pressures remain intense.”
Altschwager also said margin forecasts are more uncertain, particularly as Lululemon surprised investors on its second-quarter analyst call by indicating that the removal of the de minimis exemption would lower gross margins by 1.7 percentage points.
While Altschwager continues to see long-term value in the stock, particularly given its price-to-earnings ratio is near its lowest point in over two decades, he believes it’s more prudent to start buying shares when there is “more conviction that the negative earnings revision cycle has run its course.”
“We think the higher degree of earnings uncertainty will overshadow compelling valuation multiples in the near term, making it difficult to defend/recommend shares,” the analyst said.
Needham and Baird joined a number of other investment firms in downgrading Lululemon’s shares after the retailer on September 4 slashed its guidance for the year while reporting second-quarter results. The retailer blamed deterioration of its U.S. business, higher tariff rates and the removal of the de minimis exemption.
Bank of America recently said it was “tweaking” its model on LULU to reflect tariff offsets, slower China sales, but did not downgrade shares. However, the BofA Global Research team did reduce its price objective (PO) to reflect a lower sales growth rate.
“We are refining our model after earnings to reflect slower China growth and better tariff mitigation,” the BofA team wrote in a September 12 note. The team raised its fiscal 2026 EPS estimate 1 percent to $13.15 per share.
“Our new $185 PO (previously $210) is based on 14x P/E (was 16x) to align the multiple with peers posting a similar growth profile,” the research team continued. “We think that the lower multiple is offset by the risks to LULU’s turnaround and reiterate our Neutral rating.”
BofA Global Research believes the hit from shifting tariffs and the loss of the de minimis exemption will hit in the second half, with mitigation building in fiscal 2026.
The team noted that LULU’s total net tariff exposure in fiscal 2026 is $320 million, or $80 million incremental net pressure on top of fiscal 2025’s $240 million. They surmised the bulk of the pressure should occur in fiscal 2025 fourth, estimating a 520 basis-point impact, and suggested that mitigation should ramp through fiscal 2026.
Other post-earnings release downgrades came from Evercore ISI, HSBC, KeyBanc, Stifel, and William Blair.
Image courtesy Lululemon
