Shares of Lululemon Athletica, Inc. were downgraded to “Sell” by analysts at Jefferies on expectations that the yoga retailer would scale back its aggressive long-term guidance in the coming quarters.
Lead analyst Randal Konik noted that Lululemon’s second-quarter results, to be released this Thursday, “should be strong,” helped in part by the popularity of the fanny pack craze. He also suspects that Lululemon’s outlook for the current year will be repeated. However, Konik believes Lululemon’s recent performance is priced into the stock, and the downgrade reflects concerns about whether the retailer will announce aggressive long-term targets at its April 2022 Investor Day regarding total sales, EBIT margins, men and women can reach internationally.
Konik wrote: “Inventory levels are bloated across retail (LULU included), promotions are ramping up industry-wide, FX isn’t helping and inflation isn’t going away. We are seeing more signs of a slowdown in apparel and general merchandise spending. More importantly, we’re seeing a slowdown in spending trends across low- and high-income demos across the board.”
According to Konik, international growth aspirations are being challenged by China’s downtrend in recent months due to pandemic-related lockdowns and inflationary and macroeconomic challenges for Europe.
Announcing its five-year plan, Lululemon said it is on track to quadruple its international revenue in 2022 compared to 2018 and plans to quadruple international revenue again between 2021 and 2026. Gains are likely to be borne by China.
Konik wrote, “It is clear that macro issues are more severe in Europe and Asia than in the US, which could pressure LULU’s ability to meet lofty forecasts.”
Konik thinks Luluemon’s margin targets are “also unrealistic.”
Lululemon’s five-year margin targets were based on the expectation that promotions would remain low.
The analyst wrote: “These forecasts come on top of already high margins as industry-wide apparel sales slow, promotions ramp up and inventory levels hit record highs. With the “laws of retail” implied, it would be more than heroic for LULU to increase, let alone maintain, its sky-high margins.”
Lululemon inventories were up 74 percent year over year at the end of the first quarter.
Konik noted that while the men’s category is experiencing healthy growth, “competition is not standing still” and below-average brand awareness among men is likely to impede the next stage of growth. Konik wrote, “While there is significant scope to increase brand awareness among men, we believe that doubling the men’s business in five years will be a tall order given LULU’s premium priced products and the brand’s strong association with yoga and women.”
Finally, Konik raised concerns about the risks Lululemon faces as it approaches key new categories, including footwear and home fitness, with its Mirror acquisition, and not paying enough attention to protecting its positioning in its core apparel categories, including leggings. The analyst wrote, “We’ve seen major brands falter before (e.g. Gap, Victoria’s Secret, Abercrombie, Under Armour) and see a similar pattern at LULU.”
Jefferies has a target price of $200. Lululemon is currently trading at around $310.
Photo courtesy of LULU