JPMorgan downgrades Lululemon, sees stock moving sideways from here

CNBC

7 days ago

It's time to step to the sidelines when it comes to Lululemon Athletica , according to JPMorgan. The bank downgraded shares of the athleisure retailer to neutral from overweight. Analyst Matthew Boss slashed his price target to $224 from $303. The new forecast is less than 1% above Monday's close. "While lululemon remains underpenetrated internationally relative to peers with a notable opportunity to scale brand awareness, our work points to a normalizing pace of growth in China Mainland & product assortment challenges in the U.S. have driven elevated markdowns & a more moderate revenue growth profile for the business, with higher fixed cost leverage hurdles across ROD and SG & A expenses further constraining multiyear margins," Boss wrote. As a headwind, the analyst pointed to U.S. product catalysts pushed to the second half of the year, after customers responded poorly to Lululemon's updated core seasonal colors, which currently represents around 40% of the company's inventory mix. This has contributed to the company having to strategically offload inventory through summer promotions. "Importantly, as a result of relative underperformance within Core-Seasonal inventories, our fieldwork points to the 7/1 launch of the 'Summer Scores' promotional event advertised directly on the homepage of the DTC website & via digital marketing emails to begin clearing through additional inventory units on hand," Boss added. Meanwhile, normalizing growth in the Chinese market could ultimately cap Lululemon's CAGR — or compound annual growth rate. Stronger growth was experienced in the past few years, as the retailer scaled stores and its initial brand awareness investments. "Specifically, management noted the brand has shown relative insulation against an unfavorable China macroeconomic backdrop (though the macro environment still remains less than favorable), and our work points to a potential prolonged 'normalization' curve of revenue growth as the region aligns closer to management's +low-30s CAGR target (FY21-26), relative to a +48% CAGR experienced in FY23/24 (vs. FY21)," Boss added. LULU YTD mountain LULU YTD chart Shares of Lululemon have stumbled 42% this year.