Lululemon Downgraded To Sell Amid Shift From Athleisure To Denim

Shares of Lululemon Athletica inc. LULU were down 3 percent in pre-market hours Friday after Canaccord Genuity downgraded the stock to Sell from Hold on stiffening category headwinds.

Analyst Camilo Lyon’s downgrade stems from the following three issues:

• “A tough pant wall comparison and the inability to comp last year's gains.”
• “Rising in-store inventory levels coupled with an increasing breadth of markdowns online”, and
• “An evolving fashion shift away from athleisure to denim.”

Lyon believes these factors should result in moderating comps and EBIT margin compression now through 2018. The analyst also lowered his third quarter comp/EPS estimates to 4 percent/$0.42 from 7 percent/$0.43.

Given the challenges stated, Lyon noted that the company could reduce its full-year/fourth quarter outlook. Lyon slashed his fourth quarter EPS estimate to $0.93 from $0.97, resulting in 2016 EPS estimate of $2.02 versus the company guidance of $2.07-$2.15.

Lyon estimates about 5 percent hit to 2017 comps on slowing demand trends, the lack of newness in pants, tough comparisons and a trend shift toward denim.

“[W]e estimate that ~1.2M fewer women's pants could be sold in 2017, implying a ~$127M hit to the top line or ~5% hit to total comp,” Lyon wrote in a note.

Last month, Credit Suisse’s Christian Buss downgraded Lululemon on higher markdowns and signs of weakness in Women's Tops.

Lululemon reports its third quarter results on December 7. Wall Street expects EPS of $0.43 on revenue of $540.67 million.

Lyon also cut his price target to $44 from $65.