With Signs Of Weakness In Women's Apparel, Lululemon Gets Downgraded By Credit Suisse

Markdown intensity is likely to have increased for Lululemon Athletica inc. LULU in the current quarter, and there are signs of weakness in Women's Tops, Credit Suisse’s Christian Buss said in a report.

Buss downgraded the rating on the company from Outperform to Neutral, while reducing the price target from $76 to $53.

“Our proprietary pricing and inventory analysis suggests markdown intensity has increased for lululemon this quarter…The markdown intensity rate of 2.7% is the highest in our data set over the last 14 quarters,” Buss mentioned. There has been a sequential increase in discounting across all Lululemon’s core categories for Women and Men.

Spike In Discounting In Women's Tops

The average markdown intensity rate for Women's Tops rose from 1.7 percent in Q2 to 2 percent in Q3. During the quarter, the percentage of Tops on sale increased significantly from 7 percent in August to 13 percent in September, and then to 16 percent in October. This is higher than the historical average for 8-10 percent, Buss noted.

“This is particularly concerning in light of new top introductions for fall that we had hoped would support productivity recapture from lapsed customers,” the analyst commented. He added that pricing for Women's Tops had declined 28 percent since June.

The comp estimate for FY 2016 has been reduced from 6.2 percent to 5.1 percent, and the forward multiple has been lowered from 30x to 25x “as the benefits from restructuring and margin recapture moderate,” Buss said.