Jefferies downgrades Lululemon and Below Armor

Lululemon Athletica and Under Armor were under pressure on Monday after Jefferies downgraded their stocks. Analysts led by Randal Konik said Lululemon faces harsh comparisons and “increasing competition,” while Under Armor is distracted by “management volatility and lagging fundamentals.”

Konik wrote that a greater emphasis on fitness and increasing casualization in the workplace should help the athletic apparel and footwear sector to grow. Nonetheless, it could slow growth over the next few quarters relative to tough comparisons, and COVID “likely to pull demand forward” for the broader industry, with Lululemon being “one of the biggest beneficiaries.”

As a result, Konik sees risks for Lululemon to meet consensus estimates “as competition increases and headwinds increase.”

On the competition, Konik wrote that LULU is increasingly facing “an increasingly dense space” of competitors including Alo, Athleta, Rhone, Vuori, Nike and Adidas. He said consumers looking to save money in an inflationary climate could create opportunities for stock gains by others. “In the current inflationary environment, we believe there are cheaper alternatives with similar qualities and features to LULU’s more expensive products,” Konik wrote.

Other potential headwinds for Lululemon include potential “significant” margin compression as high inventories and expansion of non-core categories result in increased discounts and an unfavorable mix shift.

Konik said the Mirror faces more risks as the resurgence of in-person fitness training has stalled the growth of at-home fitness. “We remain cautious on the Mirror segment, which we still believe will need to be written down and eventually divested in the coming quarters,” Konik said.

LULU’s entry into footwear could also put more pressure on gross margins due to mix shifts and potential price discounts. The analyst added, “We believe there may be further distractions from the core apparel business, which could lead to potential execution risk.”

Konik thinks the longer-term consensus outlook needs to come down, and Lululemon’s stock is “still expensive,” trading at 29 times fiscal 22 earnings, despite the stock losing about 40 percent of its valuation year-to-date.
He lowered his rating on LULU to underperform from hold and lowered his price target to $200 from $375.

On Monday, shares of Lululemon fell $11.63, or 4.00 percent, to $281.76.

Konik lowered its rating on Under Armor to hold from buy and price target to $10 from $20. Under Armor shares closed at $8.62 on Monday, down 35 cents.

On Under Armor, Konik wrote that while he is encouraged by the Under Armor brand’s advancements in apparel and footwear, product launches, and strong underlying brand demand, sales growth and margins have lagged behind competitors. He added, “Furthermore, we are cautious due to the recent management change with UAA CEO Patrik Frisk stepping down after taking over as CEO in January 2020.”

Given minimal positive catalysts, the analyst expects UA’s revenue growth to continue to lag its peers. Jefferies sees Under Armor’s growth rate at 6 percent in 2023, compared to about 11 percent for Nike and 9 percent for Adidas.

Konik noted that Under Armor’s operating margin has also underperformed compared to Nike, Lululemon, and Adidas over the past five years, and macroeconomic headwinds, including supply chain delays and increased freight, will challenge further margin advances . Konik wrote, “While all companies are addressing these issues, we believe there are other companies like Nike that are better positioned to successfully navigate this challenging environment.”

Konik reiterated his buy rating on Nike with a price target of $155. Konik wrote, “NKE remains a buy rating given its global dominance and attractive valuation following the recent pullback.”

Shares of Nike closed at $105.11 on Monday, down from $2.82.

Photos courtesy of Lulemon/Under Armour

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