Lululemon has had a great year so far, posting double-digit growth in sales and profits in the second quarter, after even bigger jumps in the first. To further its reach, the brand decided to open five more net new stores this year than it previously expected.
Its “strategic initiatives, market expansion plans, and innovative product offerings position it for long-term success despite short-term challenges,” Jane Hali & Associates analysts said in a preview note on the brand’s upcoming Q3 report. “The brand's ability to adapt to evolving consumer trends and maintain a strong digital presence underscores its resilience in the competitive retail landscape.”
But the Jane Hali analysts joined a chorus of others this week warning that it could get tough for Lululemon, which has arguably revolutionized not just activewear but apparel more broadly, to maintain its momentum. That has mostly to do with its potential on Wall Street, with a share price that has neared all-time highs; at press time it was trading around $460 per share.
“This situation implies that any misstep in even a single aspect could potentially limit upside in the very near term,” Jane Hali analysts said.
On Monday, the situation led Wells Fargo analysts led by Ike Boruchow, who in January said they expected the stock to outperform, to downgrade that a notch. They maintained their price target of $445. The January upgrade was based on expectations that inventory would improve after the holidays, freight costs would ease and sales overseas, especially in China, would see “robust growth.”
“Simply put, these factors have played out,” Boruchow said.
Moreover, some Lululemon competitors, including Gap Inc. and Victoria’s Secret, have more room to improve productivity and margins in coming quarters, according to Wells Fargo.
Jeffries analysts led by Randal Konik similarly observed that competition and year-over-year comparisons could squeeze Lululemon next year. Lululemon is a strong brand, but it operates in the highly competitive segment of athletic apparel, they said.
“We believe that consensus expectations are too high, particularly in the international and men's segments, given rising competition and relatively low brand awareness in many international markets,” Konik said.
Not all analysts are so cautious. While acknowledging that the share price jumps of recent weeks could limit upside near-term, Evercore ISI analysts led by Michael Binetti maintained their “outperform” grade and raised their price target to $530 from $475. TD Cowen analysts led by John Kernan also raised their share price target slightly to $545 from $540, and expressed confidence that Lululemon’s “new product, integrated marketing, and online momentum combined with loyalty, a healthy high-end customer demographic, and athleisure fashion trends will yield traffic, improving conversion, and comps.”
“Our survey indicates a high degree of loyalty and conversion levels should increase as we expect new product to incorporate fashionable versatility,” Kernan said.
Evercore sees little risk to Lululemon’s market share, even from rising new brands. Footfall at Lululemon stores, which fell as much as 20% after Alo or Vuori opened stores nearby, recovered after six months, according to Evercore research. These analysts also believe that Lululemon “will be the best China story in the sector” in the next two years, and dismissed worries of slowing growth in North America, noting that the brand has re-accelerated trends there twice, on both a one-year and three-year basis, since the first quarter of 2021.
“3Q is a sideshow,” Binetti said. Lululemon “is a 2024 & beyond story.”