Is Lululemon’s Growth Slowing Down? Why Analysts Lowered Price Targets for the Brand

Samantha McDonald
·3 min read

Despite a solid fourth-quarter earnings and sales beat, analysts are lowering their price targets for Lululemon Athletica Inc. — but it’s not all bad news for the athleisure giant.

For the three months ended Jan. 31, the Canada-based chain posted adjusted diluted earnings per share of $2.58, versus consensus bets of 82 cents in earnings per share. Revenues increased 24% to $1.7 billion, compared with Wall Street’s predictions of $997.45 million. However, its stock fell more than 4% in Wednesday midday trading.

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A likely explanation for the decline in its share price: Investors are likely skittish after LULU execs cautioned in a Q4 call with analysts that they expect certain investments to weigh on SG&A costs — and, as a result, profits would be pressured. In tandem, a number of market watchers lowered their price targets, without changing their “outperform” or “buy” ratings.

J.P.Morgan equity research analyst Matthew Boss downgraded his PT from $442 to $418 but explained that the chain still has “a place domestically” while international remains “an untapped opportunity.”

He added, “Our top-line build points to $5 billion-plus brand (versus $2 billion in the 2015 fiscal year), supported by: significant untapped international presence; outsized growth of men’s; a push into newer categories such as personal care; and ongoing growth in the e-commerce business to augment low-double-digit growth in the core North America’s business.”

Two years ago, Lululemon announced its “Power of Three” plan, which aims to more than double the size of its men’s revenues, more than double its digital revenues and quadruple its international sales — all by 2023. Beyond strategic investments abroad, in e-commerce and in its product pipeline, it also acquired Mirror last summer in a $500 million deal, with plans to “invest more than initially anticipated to build long-term value in this business,” said CFO Meghan Frank.

According to Cowen research analyst John Kernan, who lowered his PT to $385 from $389, consensus estimates for Lululemon need to come down to account for higher SG&A expenses associated with such investments — particularly in the marketing of Mirror. (In the fourth quarter, SG&A expenses were $545 million, or 31.5% of net revenue, compared with the prior year period’s 28.2%.)

Still, he said, “We have confidence that new product, integrated marketing and online momentum combined with loyalty, a healthy high-end customer demographic and athleisure fashion trends will yield traffic, improving conversion and comps. Our survey indicates a high degree of loyalty and conversion levels should increase as we expect new product to incorporate fashionable versatility.”

What’s more, the company shared that it also faced headwinds related to more COVID-19-induced store closures and capacity constraints than originally anticipated. While total comparable sales rose 21% and direct-to-consumer revenues surged 94%, it recorded a comparable store sales decrease of 28%. In addition, it is also gearing up for the launch of its inaugural shoe line. (According to CEO Calvin McDonald, the debut is slated for early 2022.)

Although BTIG managing director Camilo Lyon lowered his PT from $453 to $434, he wrote in a distribution note that Lululemon is “well-positioned” to weather the pandemic “from both a liquidity perspective and a brand perspective.” (The company ended 2020 with $1.2 billion in cash and equivalents.)

“We believe Lululemon is among the few companies that entered the current environment from a position of strength and, as such, will exit it stronger,” he said. “In addition, we believe Lululemon is a beneficiary of consumers continuing to spend on at-home exercise/workout-related activities in the current COVID-19 environment.”

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