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Lululemon stock downgraded as shoppers seek out value deals

Tue, Dec 5, 2023, 7:42 AM

BRAD SMITH: Raymond James downgrading Lululemon to outperform. That is down from a strong buy here, but the analyst hiking the price target to $495 per share. The investment bank saying soft US consumer demand will make it difficult for the company to deliver blow out fourth quarter results. Also saying competitor promos in the athletic category were similar or up compared to last year and that's a sign of duress from the industry.

This comes just a day after Wells Fargo also downgraded the company to equal-weight from overweight, but leaving the price target unchanged here. I've seen a wave of promotions across athleisure, especially amid the holiday season and it's been remarkable. And now it's showing up in this most recent call from Raymond James as well.

SEANA SMITH: Yeah, it has Alo, one of their biggest competitors, essentially ran a 30% off sale for the better part of November. Lululemon, I did some shopping there over the Black Friday weekend.

BRAD SMITH: Oh, yeah?

SEANA SMITH: Yeah, getting ready for the holidays.

BRAD SMITH: It's not about the belt bags this year.

SEANA SMITH: Not about the belt bags, although they were also on sale. But there was a heck of a lot of their merchandise-- that a lot of their products that were included in their sale offerings. More, I thought, than maybe or at least the same, a pretty level playing field, than what we saw last year. So just on the consumer side, anecdotally, I have noticed this.

In terms of what this means, I think, going into 2024, we talk about the fact that consumers are pulling back on their spending. They're thinking twice about their budgets. They're not necessarily going out spending 120 bucks on yoga pants when they could get it cheaper elsewhere.

So a lot of these companies that did have that pricing power up until this point are being forced to adjust. Lululemon potentially being one of them. And that's the reason why we've seen a number of analysts get a little bit more bearish, or a little bit more cautious maybe is a safer thing to say, when it comes to this name and what those future gains could look like here in the short term.

BRAD SMITH: Well, that's a question about what is the trade down look like in athleisure right now? We've spoken to all of seemingly the running CEOs or at least executives from some of the major running companies. Brooks Running, New Balance, Nike, we had the opportunity to speak to their chief impact officer and discussed running with them as well. And all of these things considered, sure, the shoe and the innovation that people are looking across, that's one facet of this.

But then if you think about the rest of the attire that you're purchasing, what's that trade down look like? Does it mean that people are going from purchasing Lululemon to purchasing maybe Gap's Athleta or does that mean that you're purchasing-- I was just looking at some sales on Fabletics, for goodness sakes. It's like there are just a range of options that are out there for consumers, especially in this time of year. And for a lot of those companies that are playing in this space, many of them who are publicly traded, thinking about what that next leg of innovation looks like beyond just how far does it stretch, what the moisture wicking looks like, and all the different categories that they're trying to play in as the corporate workplace becomes a little bit more casual. You see me come in every day, I'm wearing a hat and a hoodie.

SEANA SMITH: I wear leggings a lot when I'm outside.

BRAD SMITH: Exactly. So we're stepping in here in athleisure and casual wear every morning here. And at the end of the day, I think that trade down could benefit some other companies that we typically wouldn't think of as leaders in this category, but certainly do have market share just because of the fact that they've got scale.

And Gap could be one of those. There's no major calls out on that right now. That's just what I'm thinking through.

SEANA SMITH: And American Eagle, too, right?

BRAD SMITH: American Eagle.

SEANA SMITH: Their Aerie Brand has been very popular, especially amongst Gen Z and Millennials. So you talk about the fact that when you take a look at their leggings, which typically range between 45 to 60 bucks, many of them also on sale right now. If you're looking to save a buck, that could be a good option, too. So certainly there is this trade down going on and that's been consistent almost across the board.

BRAD SMITH: Yeah, that's spot on.

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Lululemon stock downgraded as shoppers seek out value deals

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