The trend of athletic leisure is showing signs of fatigue and seems to be losing favor with consumers, making it easier for lululemon (LULU.US) to be affected by a softening consumer trend and an increase in promotional activity in the category, and leading to a more competitive relationship with Alo Yoga and Vuori.
This dynamic, coupled with lululemon's execution issues and a tougher macro backdrop, led to a downgrade of the stock to neutral from buy, and a 28% price target cut to $300.
“After three consecutive years of abnormal strong growth in the apparel market (particularly in the US), the category decelerated significantly in FY24, and we did not see any signs of a change in the trend in the second quarter relative to the first quarter,” said Paul Lejuez, analyst at Citi, in a Thursday note.
Citi's downgrade weighed on the stock, which fell to a four-year low on Thursday.
In addition to the negative commentary on lululemon, the company recently decided to pause sales of its new Breezethrough line, a lightweight, quick-drying fabric that could give lululemon an edge over its competitors, but now looks like mixed reviews have prompted the company to rethink its designs. According to BTIG, the company said it would make “design adjustments,” but people seem to agree that the fit of the pants — particularly the front seam — and the unflattering look are the main culprits.
“The innovation pause exacerbates execution risk,” said Matthew Boss, analyst at JPMorgan, who cut his price target by 26% to $338 and removed the stock from his coverage list, but maintained his overweight rating, as the brand “still has a place in the domestic market and has untapped opportunities internationally.”