Analysts revise price target on Lululemon shares ahead of earnings

As Kim Kardashian’s clothing brand Skims prepares for its IPO, rival Lululemon may not be in the best shape.

Lululemon Athletica’s (LULU) the share price has almost halved since the start of the year, down 46%. On March 22 alone, it fell 15% after disappointing 2023 financial results.

The athletic apparel retailer offered a cautious outlook for 2024 during its March earnings release and reaffirmed that goal after the first quarter. It forecast net income of $10.7 billion to $10.8 billion for the year, reflecting a growth rate of 11 percent to 12 percent, below historical levels and Morningstar’s estimate of 14 percent.

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“The consumer environment in the United States has been somewhat challenging,” CEO Calvin McDonald said in March.

Lululemon’s biggest rival, Nike, also suffered from the slowdown in spending. In June, Nike’s fiscal fourth-quarter earnings posted its biggest one-day drop of 20% since 1980.

In addition to Nike, Lululemon faces more competition from new premium labels like Alo Yoga and Vuori, which are similarly priced.

Former Lululemon CEO Chip Wilson: “The definition of a brand is that you’re not everything to everyone.”

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What’s Lululemon’s Bigger Problem?

However, Lululemon’s biggest challenge lies not in external factors, but in something more internal.

The company erred on the side of product categories, struggling to choose between targeting a larger group of customers with more categories or sticking to a smaller, easily defined consumer base.

“We saw a slower start to the year due to a number of internal factors, including missed opportunities in bags and women,” McDonald said during the June earnings call, “We didn’t maximize (women’s) business in the U.S., which was the result of several missed opportunities, including a color palette and our core assortment, particularly in leggings that were too narrow.”

Lululemon founder and former CEO Chip Wilson didn’t like Lululemon’s approach.

“They’re trying to become like Gap, everything to everyone. And I think the definition of a brand is that you’re not all things to all people… You have to be clear that you don’t want certain customers to come in,” Wilson said.

The comments led to criticism of the founder, but Lululemon no longer resembles its earlier days, when it sold only yoga products. It also doesn’t compare to Gap or Nike, which offer a wider range of categories.

Lululemon said it will add more colors and sizes as shoppers look for additional options. The company cut its stock by 15% to $1.3 billion in the first quarter. However, inventory levels are expected to increase in the second half of the year, which is in line with expected sales growth.

Related: Top rival Lululemon makes bold expansion move

For the fiscal first quarter ended April 28, Lululemon earned $2.54 per share, beating analysts’ expectations of $2.38. Revenue of $2.21 billion also beat expectations of $2.19 billion.

However, the company reported a slower pace in the Americas, with sales rising 3% from 17% a year ago. Comparable sales were flat in Q1 compared to last year.

For the second quarter of 2024, the company expects net income to be between $2.40 billion and $2.42 billion, an increase of 9% to 10%. Diluted earnings per share are expected to be between $2.92 and $2.97.

Lululemon will report its Q2 earnings on Thursday, August 29.

Analysts Cut Price Target on Lululemon Shares Ahead of Earnings

At least 11 analysts cut their price targets on Lululemon stock ahead of its earnings this month.

Raymond James analyst Rick Patel lowered Lululemon’s price target to $350 from $400 and maintained an outperform rating.

The firm cut its Q2 and FY24 revenue forecasts to slightly below consensus estimates. However, the company believes Lululemon can benefit from better inventory of key items in the second half and remains confident in its long-term drivers.

Morgan Stanley analyst Alex Straton lowered Lululemon’s price target to $329 from $404 and maintained an overweight rating. The analyst sees room for a second-quarter EPS beat and an increase in guidance for the fiscal year, but in terms of “potentially lower quality factors,” the analyst said, adding that Lululemon’s position is “still compelling.”

Analyst Piper Sandler maintained a neutral rating and a $250 price target.

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“The stock has been underweight year-to-date, with buy prices in negative revisions going forward,” the analyst told investors in a note.

The analyst noted that as the U.S. market matures and competitors aggressively target customers, it becomes increasingly difficult for Lululemon to attract and retain new customers. The slowdown in consumer spending makes predicting Lululemon’s future performance even more difficult.

Lululemon shares traded at about $271 on August 27.

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