Wednesday, 1 February 2023
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Time for a ‘reality check’ for lululemon athletica

Time for a 'reality check' for lululemon athletica - Bernstein

© Reuters. Time for a ‘reality check’ for lululemon athletica (LULU) – Bernstein

By Sam Boughedda 

Lululemon Athletica (NASDAQ:) was downgraded to Underperform from Market Perform by Bernstein analysts, who also cut the firm’s price target on the stock to $290 from $340 per share.

The analysts said in a research note to clients that “Lululemon has a reset coming” after 25% sales growth and 30+% earnings growth for five straight years.

“This past year, our biggest concern on LULU has been the bullish expectations of perpetual 20+% top line growth. Now, with pent-up demand running out, a more cautious N.Am consumer, higher promotions, and new categories too small to offset a softer core business, it’s time for that reality check,” said the analysts. “We model a considerable deceleration to 13% growth in FY23 and 11% CAGR thereafter, a decel that is already reflected in Mgmt’s medium-term targets but not (yet) in investor expectations.”

The analysts explained that LULU’s premium prices and low promotions drive industry-leading margins, so there’s limited room to improve.

“Negative mix effects from non-core category expansion (Men’s, Intl, Mirror, Shoes), less productive international stores, promotions inching up as assortment expands, and higher marketing spend to drive awareness in new mkts, are all structural headwinds,” stated the analysts.

“The expectations vs. reality gap has been our biggest concern this past year. Now, with no more pent-up demand, a more cautious consumer outlook, and negative margin mix shifts, earnings growth will decelerate materially and we expect the multiple to follow.”

Lululemon shares are down 2.4% in early Tuesday trading.

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