Though analysts still expect plenty of positives ahead for the athleisure behemoth, Lululemon Athletica Inc. may be struggling with tariffs, consumer anxiety and a pressing need to raise brand recognition.
Late Thursday, the business (LULU) published fourth-quarter earnings with less-than-expected forecast among “ongoing macro uncertainties,” which sent its shares spiraling.
Last down 14.6%, the stock was on route for its largest one-day percentage drop in almost a year. According to Dow Jones Market Data, it closed down 15.8% last time it dropped this much, March 22, 2024.
Truist Securities, in a note published Friday, notes that although the prognosis projects low-single-digit sales growth in the United States, trends outside remain stronger, particularly in China.
“International momentum remains robust,” said Truist analyst Joseph Civello, pointing out that China is opening most of the company’s new outlets. “Although Chinese consumers face more general macro pressures, [Lululemon’s] underlying momentum in the area remains consistent/robust,” he said. Truist kept Lululemon’s buy recommendation while cutting its price objective from $460 to $380.
Lululemon Chief Executive Calvin McDonald said on the conference call to go over the results that the firm must increase brand awareness, which he called a “significant opportunity” worldwide especially in the United States.
Still, Truist saw highlights in Lululemon’s fourth-quarter stats. Civello said, “while we are disappointed in the tepid outlook, we would highlight that units per transaction and average order value are both higher & markdowns were lower [year-over-year] in 4Q and are expected to remain flat this year, which all suggest underlying brand equity remains solid.”
Truist also mentioned Google Trends data showing that Lululemon’s search activity has lately increased. “We see prospects for trends to accelerate as new products and marketing campaigns launch,” Civello wrote.
Other observers concurred. In a report posted Thursday, Stifel confirmed its buy rating for the stock but cut its price objective from $438 to $424.
Stifel analyst Jim Duffy said “New product introductions including the Glow Up, Daydrift, and BeCalm are reportedly resonating with guests following product missteps in 2024.” Stifel also mentioned Lululemon’s track record for outperformance and concrete near-term motivators include China and a better product lineup.
“We see Lululemon uniquely positioned at the junction of secular trends and believe international growth contribution is under-appreciated in shares,” he penned. “Building on outstanding performance and market share gains, we expect LULU to sustain strong growth by both adding additional new consumers to the franchise and continuing expanded absorption of the offering to increase revenue per customer.”
Once more a major topic of discussion on Lululemon’s earnings conference call, “newness” reflected a focus shared by other clothing behemoths including Nike Inc. (NKE). McDonald claimed that growing worries about inflation and the economy are causing consumers to spend less; this is showing up as decreased traffic throughout the sector in the first quarter.
According to a FactSet transcript, “we see guests who visit us responding to the newness and innovations we have brought into our assortment,” he stated. “We find this to be a positive indication.”
“The strong customer response to newness gives us confidence that [Lululemon] can improve [North America] sales growth when traffic stabilizes,” BofA Securities analyst Lorraine Hutchinson said in a report published Friday. “We expect better product and activations to drive sales upward should this consumer soft patch prove to be brief.”
BofA reiterated Lululemon’s buy rating but dropped its price objective to $400 from $480.
Comparatively to the S&P 500 index’s SPX increase of 7.7%, lululemon shares have down 24.7% in the past 12 months.
