When Kim Kardashian’s clothing brand, Skims, prepares its IPO, its rival, Lululemon, might not be in the best shape.
Lululemon Athletica’s (LULU) share price has nearly halved since the beginning of the year, down 46%. It tumbled 15% on March 22 alone following disappointing full-year 2023 financial results.
The athletic wear retailer provided a cautious outlook for 2024 during its March earnings release and reaffirmed that goal after the first quarter. It anticipated net revenue between $10.7 billion and $10.8 billion for the year, reflecting a growth rate of 11% to 12%, below historical levels and Morningstar’s 14% estimate.
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“The consumer environment in the United States has been somewhat challenging,” CEO Calvin McDonald said in March.
Lululemon’s bigger rival, Nike, also suffered from the slowdown in spending. In June, Nike’s fiscal Q4 revenue miss caused its biggest one-day drop of 20% since 1980.
Besides Nike, Lululemon faces more competition from new premium labels such as Alo Yoga and Vuori, which have similar prices.
What’s Lululemon’s bigger problem
However, Lululemon's greater challenge lies not in external factors but in something more internal.
The company has made errors on product categories, struggling to choose between catering to a larger group of customers with more categories or sticking to a smaller, easy-to-define consumer base.
“We've seen a slower start to the year due to several internal factors, including missed opportunity in women's and bags,” said McDonald during June’s Q1 earnings call, “We did not maximize the [women’s] business in the U.S., which was the result of several missed opportunities including a color palette and our core assortment, particularly in leggings that was too narrow.”
Lululemon’s founder and former CEO Chip Wilson didn’t like Lululemon’s approach.
“They’re trying to become like the Gap, everything to everybody. And I think the definition of a brand is that you’re not everything to everybody… You’ve got to be clear that you don’t want certain customers coming in,” said Wilson.
The comments have led to criticism against the founder, but Lululemon no longer resembles its earlier days when it only sold yoga products. It also does not compare to Gap or Nike, which offer a broader range of categories.
Lululemon said it will add more colors and sizes as shoppers seek additional choices. The company reduced its inventory by 15% to $1.3 billion in the first quarter. However, inventory levels are anticipated to increase in the second half of the year, which is in line with expected sales growth.
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For the fiscal first quarter ended April 28, Lululemon earned $2.54 per share, topping the $2.38 expected by analysts. Revenue of $2.21 billion also surpassed the expected $2.19 billion.
However, the company reported a slower pace in the Americas, with sales increasing 3% compared to 17% a year ago. Comparable sales were flat in Q1 from last year.
For the second quarter of 2024, the company expects net revenue to be between $2.40 billion and $2.42 billion, a growth of 9% to 10%. Diluted earnings per share are expected to be between $2.92 and $2.97.
Lululemon will post its Q2 earnings on Thursday, August 29.
Analysts lower Lululemon stock price target before earnings
At least 11 analysts lowered their price targets on Lululemon stock ahead of its earnings this month.
Raymond James analyst Rick Patel lowered Lululemon’s price target to $350 from $400 and kept an outperform rating.
The firm has reduced its revenue forecasts for Q2 and FY24 to slightly lower than the consensus estimates. However, the company believes that Lululemon can benefit from better in-stock of key items in the second half and remains confident in its long-term drivers.
Morgan Stanley analyst Alex Straton lowered Lululemon’s price target to $329 from $404 and kept an overweight rating. The analyst sees room for a Q2 EPS beat and fiscal year guidance raise, but on "potentially lower-quality drivers," the analyst said, adding that Lululemon’s position is “still compelling.”
Piper Sandler analyst maintained a neutral rating and a $250 price target.
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“The shares have been cut in half year-to-date, with the buy-side pricing in negative revisions ahead,” the analyst tells investors in a note.
The analyst noted that as the US market matures and competitors aggressively target customers, Lululemon is becoming more challenging to attract and keep new customers. The slowdown in consumer spending is making it even harder to forecast Lululemon’s future performance.
Lululemon stock traded at around $271 on August 27.
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