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HomeMarketLululemon's Stock Has 'A Lot of Downside Risk'

Lululemon’s Stock Has ‘A Lot of Downside Risk’

Athleisure-apparel retailer Lululemon’s high valuation multiple is hard to justify in a cheap sector, noted Jefferies analyst Randal Konik.

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David Paul Morris/Bloomberg

Out of all the sales over the long Black Friday weekend, athleisure shoppers enjoyed some of the best. By contrast,
Lululemon
Athletica stock still looks pricey, warns Jefferies. That’s a relative rarity in the industry.

On Thursday, analyst Randal Konik reiterated an Underperform rating and $200 price target on Lululemon stock (ticker: LULU), arguing that there are reasons to be cautious about the stock even beyond the weak outlook that sent shares tumbling last week.

“We believe Lululemon’s fundamentals have peaked and believe the company’s long-term growth projections are unachievable,” Konik said in remarks provided by Jefferies, adding, “We see a lot of downside risk for Lululemon shares.”

He believes that won’t be the last time that Lululemon has to temper expectations. In fact the company’s implied guidance of roughly doubling its clothing revenue by fiscal 2027 looks too ambitious, he argues, given that that target would require its adult-apparel business to be nearly as big as that of industry behemoth
Nike
(NKE).  

Moreover, Konik warns that Lululemon was one of the many companies that had to offer steeper discounts this holiday season, at the same time that competition is heating up, end market demand is weakening, and the popularity of sale-boosting bag belts is waning.

All of that makes Lululemon’s multiple—approaching 30 times forward earnings—harder to justify, the analyst believes.

Lululemon did not return requests for comment.

Betting against Lululemon has been an exercise in futility in recent years, however, as the company enjoyed a huge pandemic bump, and Konik is one of just two bearish analysts. Yet the stock is down about in-line with the
S&P 500
this year, even as its valuation remains stubbornly high in an area of the market that’s had little to offer other than cheap stocks.

Indeed, with the consumer discretionary off more than 35% in 2022, low multiples have been one of the few things to recommend it: Bulls argue that investors should hold their nose and buy now, as supply-chain problems, inflation, and lackluster consumer demand should all ease sometime next year.

However, on a forward basis, Lululemon is more expensive than all its key peers save
Nike.
Trading at nearly seven times sales, it’s the most expensive consumer discretionary stock today.

“Lululemon doesn’t trade like the rest of retail, and we fear early signs that costs to maintain industry-leading growth are increasing as the brand stretches past core loyalists, raising our concerns over future margin pressures,” wrote BMO analyst Simeon Siegel last week.

Although he has a Market Perform rating on the shares and doesn’t address the company’s long-term outlook, Siegel has long argued that many companies have grown their topline for growth’s sake, at the expense of profits. By that logic, even if the company were to defy Konik’s predictions and rapidly scale up its apparel sales, that could mean more quarters like the most recent one, making gross margin misses common place rather than rare.

Of course gross-margin pressure has been a hallmark of retail this year, given supply and demand woes, but it’s not a club Lululemon would want to join—particularly if it wants to keep a premium valuation.  

In addition, brand dilution could be particularly costly for Lululemon. Morningstar’s David Swartz rates the shares at the equivalent of Underperform, and is one of the other few cautious voices on the Street. He sees the shares trading down to $229. Lululemon doesn’t have “moat sources besides its intangible brand asset,” Swartz wrote. “The company lacks efficient scale or cost advantage as its production and distribution systems are like those of most apparel companies.”

Barron’s has already noted that the athleisure space was particularly susceptible to promotions this holiday season, so that’s another potential pressure for the stock come January once Christmas sales figures start rolling in.

Ultimately Lululemon could surprise the naysayers again, but it looks like the wall of worry is getting harder to climb. At the same time, it’s competing with a lot of other discretionary stocks that can be picked up for a song. Other companies that sell athletic apparel—from
Foot Locker
(FL) to
Dick’s Sporting Goods
(DKS) and the big department stores—are all trading at less than 10 times forward earnings.

They certainly don’t have the earnings outlook that Lululemon does, but if that linchpin falters, as critics fear, the shares could have farther to fall.

Write to Teresa Rivas at teresa.rivas@barrons.com

Credit: marketwatch.com

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