- Bernstein analyst Aneesha Sherman downgraded Lululemon Athletica Inc LULU from Market Perform to Underperform and lowered the price target from $340 to $290.
- The analyst said in the last year, the biggest concern on LULU has been the bullish expectations of perpetual 20+% top-line growth.
- With pent-up demand running out, a more cautious North American consumer, higher promotions, and new categories too small to offset a softer core business, it's time for that reality check, added the analyst.
- So, the analyst models a considerable deceleration to 13% growth in FY23 and 11% CAGR thereafter, a decline that is already reflected in management's medium-term targets but not yet in investor expectations.
- LULU's premium prices and low promotions drive industry-leading margins, so there's limited room to improve, cited the analyst.
- Negative mix effects from non-core category expansion, less productive international stores, promotions inching up as assortment expands, and higher marketing spend to drive awareness in new markets are all structural headwinds, said the analyst.
- The analyst thinks EPS growth will dramatically slow from 39% 5-yr CAGR (2017-22) to 33% in FY22 to 12% next year and mid-teens thereafter, putting LULU considerably below higher-growth sportswear names and below its pre-COVID growth.
- The analyst expects the growth reset to drive a further de-rating following the FY23 guidance.
- The most important indicators of brand health will be from LULU's North American business, still the bulk of sales and profits, and the area of most uncertainty in terms of consumer sentiment.
- Price Action: LULU shares are trading lower by 2.88% at $306.98 in premarket on the last check Tuesday.
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