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A bleak start to the year for Lululemon Athletica Inc. worsened this week after the departure of a key executive exacerbated Wall Street’s concerns around the outlook for the activewear company just ahead of its earnings report.
Shares slumped 11 per cent this week, driven by the news that chief product officer Sun Choe is leaving the company and its merchandising and branding teams will be reorganized. The stock has now declined 41 per cent this year and is the worst performer in the S&P 500 index so far in 2024.
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It’s a reversal of fortune for Lululemon shares, which largely outperformed the U.S. equity gauge in recent years amid strong consumer demand for the company’s pricey leggings and other sportswear. A lacklustre initial annual outlook, signs of softer sales trends during the retailer’s first quarter and increased competition had already pressured shares this year.
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“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,” Wedbush Securities Inc. analyst Tom Nikic said in a note following the organizational changes. He reiterated his outperform rating on shares, but slashed his 12-month price target to US$397 from US$492.
Lululemon will report fiscal first-quarter results after the market closes on June 5. Evercore ISI analyst Michael Binetti said investors are looking for an update on the company’s strategy for product development and merchandising.
The departure of Choe prompted Binetti to remove Lululemon from his list of top picks. He maintained his outperform rating on shares, touting the company’s international growth, but said he is less confident in the trajectory of the business in the near term.
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Lululemon’s outlook for the current quarter will be key for investors as U.S. sales trends for the retailer’s first quarter have looked weak. Binetti said data for May has been mixed so far.
“It’s been an inconsistent signal,” he said. “That’s why the update in a couple of weeks is so important.”
John Zolidis, founder of consumer-focused investment adviser Quo Vadis Capital Inc., also removed his long recommendation on Lululemon shares this week. He noted that Choe’s departure follows concerning commentary from the company on its March earnings call, where it blamed both squeezed shoppers and the wrong product assortment for a softer start to its fiscal year.
“It’s very troubling,” he said. “It sounds like something is very wrong with the merchandising or the execution.”
In one positive sign, Lululemon’s level of discounting has significantly moderated in May after spiking in earlier months, according to Wedbush’s Nikic. This could suggest that trends have stabilized in the current quarter and management will sound more optimistic on its upcoming earnings call, he said.
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Lululemon isn’t the only activewear company struggling as consumers rein in their discretionary spending, particularly in categories they splurged on during the pandemic. Nike Inc. shares have slid 16 per cent this year as the company works to revive sales growth, and Under Armour Inc. shares have dropped 24 per cent as it restructures its business. Still, On Holding AG and Deckers Outdoor Corp. shares have climbed in 2024 on robust demand for their sneakers.
Binetti at Evercore remains positive on the sportswear space, despite signs of softer sales recently. He said newer entrants such as Deckers’ Hoka sneaker brand and Alo Yoga “are waking consumers up in these categories,” which benefits the overall industry.
Bloomberg.com
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