The Ratings Game: Lululemon stock’s a sell, says Jefferies; analysts expect company to dial in aggressive long-term goals


Lululemon Athletica Inc. stock was downgraded to sell by Jefferies on Monday with analysts expecting the yoga-gear maker to dial back aggressive long-term guidance in the coming quarters.

Analysts led by Randal J. Konik said they expect the company’s second-quarter earnings due for release on Thursday will be strong and that the company will reaffirm its third-quarter guidance, “but that’s not our concern.”

“Our downgrade thesis is based on a view that long-term projections are aggressive across total revenues, EBIT [earnings before interest and taxes] margins, men’s, and international. We believe in coming quarters, LULU will have to walk back its long-term projections as competition rises, end markets weaken, and promos increase industry-wide,” they wrote in a note to clients.

Lululemon LULU, -0.03% likely benefited from one fad in the second quarter too.

“Checks suggest business was on solid footing in the second quarter and the current “Belt Bag” craze was an added benefit,” said the note. “We believe traffic likely stayed positive (10% disclosed at April analyst day) and ticket growth also helped. Our second-quarter estimates are roughly in line with consensus.”

See: Lululemon ‘not immune’ to inflation, supply-chain disruptions, but sales shine

The company also has momentum in the back-to-school season and its full-year outlook does not include share repurchases, said the note.

However, Lululemon is not immune to the inventory overhang that is hurting clothing retailers across the board at present and leading to major discounting. At the same time, “inflation isn’t going away,” and the strong dollar is not helping.

Don’t miss: Here’s what the big inventory problem for retailers looks like

“We are seeing more evidence of slowing spend across apparel and general merchandise. More importantly, we are witnessing slowing spending trends across low- and high-income demos broadly,” the analysts wrote.

Lululemon’s five-year targets depend heavily on international market growth with China accounting for much of its sales guidance of a more than $6 billion increase to above $12 billion.

See also: Lululemon is launching a membership program, part of a plan to reach $12.5 billion in revenue in five years

“It’s clear macro issues are more severe across Europe and in Asia than in the U.S. which could pressure LULU’s ability to meet lofty projections,” said the note.

At the company’s analyst day, the company said it expected margins to keep rising from current levels, but with the rest of the sector feeling the pain, those targets look overdone.

“Given the implied “Laws of Retail,” it would be beyond heroic for LULU
to increase, let alone maintain, its sky-high margins,” said the note.

Lululemon shares were down 0.2% in afternoon trading Monday, and have fallen 21% in the year to date, while the S&P 500 SPX, -0.15% has fallen 15%.

Don’t miss: It’s not just inflation. People aren’t visiting clothing stores like they used to because they’re sick of loungewear.

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