Lululemon Athletica Inc. (NASDAQ:LULU) experienced a rough week as its shares fell 10% following the departure of Chief Product Officer Sun Choe, heightening Wall Street’s concerns just before the company’s earnings report. The stock has now dropped 41% this year, making it the worst performer in the S&P 500 Index for 2024.
This marks a significant turnaround for Lululemon, which had previously outperformed the US equity market due to strong consumer demand for its high-priced activewear. However, a weak annual outlook, signs of declining sales in the first quarter, and growing competition have put pressure on its shares this year.
“Clearly, the narrative around the company has worsened, and as a result, we no longer think Lululemon will command the valuation multiples it has achieved in recent years,” wrote Tom Nikic, an analyst at Wedbush Securities. He maintained an outperform rating on the stock but lowered his 12-month price target from $492 to $397.
Lululemon is set to report its fiscal first-quarter results after the market closes on June 5. Investors are eager for an update on the company’s product development and merchandising strategy. Evercore ISI analyst Michael Binetti expressed less confidence in the near-term trajectory of the business following Choe’s departure, although he remains optimistic about the company’s international growth.
The outlook for the current quarter is crucial as US sales trends have been weak. Binetti noted that May’s data have been inconsistent, underscoring the importance of the upcoming update.
John Zolidis, founder of Quo Vadis Capital, removed his long recommendation on Lululemon shares, citing Choe’s departure and concerning comments from the company’s March earnings call, which blamed squeezed shoppers and a poor product assortment for a slow start to the fiscal year.
In a positive sign, Lululemon’s level of discounting has significantly moderated in May after earlier spikes, according to Wedbush’s Nikic. This could indicate stabilizing trends and a more optimistic outlook on the upcoming earnings call.
Lululemon is not alone in facing challenges as consumers cut back on discretionary spending. Nike Inc. (NYSE:NKE) shares have fallen 15% this year as the company attempts to revive sales growth, and Under Armour Inc. (NYSE:UA) shares have dropped 24% amid business restructuring. However, shares of On Holding AG (NYSE:ONON) and Deckers Outdoor Corp. (NYSE:DECK) have risen in 2024, driven by strong demand for their sneakers.
Binetti remains positive on the sportswear sector, noting that brands like Deckers’ Hoka and Alo Yoga are invigorating consumer interest, which benefits the overall industry.
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