Wall Street analysts believe Lululemon Athletica Inc (NASDAQ: LULU) will take time to recover after the athleisure specialist trimmed its full-year guidance for profit and revenue.
In the earnings release, Calvin McDonald, the company’s chief executive, cited execution missteps in key product categories and “missed opportunities to create new trends” for underperformance.
And while he committed to new initiatives aimed at revitalising the struggling US business as well as increasing marketing spend in China, Bernstein and Stifel experts are convinced these remedies are unlikely to prove a quick fix for Lululemon stock.
Including the post-earnings plunge, LULU shares are down nearly 60% versus their YTD high.
Why did Bernstein and Stifel slash Lululemon’s stock price target
Both Bernstein and Stifel analysts reduced their price target on LULU stock following the earnings release, citing deteriorating fundamentals and macro pressures.
According to them, the athletic apparel retailer is facing a dual threat: continued weakness in the US and signs of slowing momentum in China.
Plus, they no longer see Lululemon as particularly well-positioned to weather the removal of the de minimis exemption and rising tariffs.
Additionally, even the affluent consumer is now pulling back on discretionary spending amid rising concerns of inflation, which is proving painful for a premium-priced brand like Lululemon.
According to CEO Calvin McDonald, the company has let product cycles drag too long, especially in casual wear, leading to a stale assortment and missed trend opportunities.
LULU shares are not trading at an attractive valuation
While Lululemon shares have tanked sharply this year, they’re still priced at a premium compared to peers.
It’s forward price-to-earnings (P/E) ratio of nearly 14 is hard to justify given the revised guidance and slowing US sales.
And its price-to-sales (P/S) multiple of 2.25 currently sits well above 0.42 for Under Armour.
Compounding concerns is insider activity: over the past 12 months, executives have aggressively sold LULU stock.
Insider ownership currently sits below 1.0%, suggesting limited alignment with long-term shareholders.
Note that insider sales often indicate a lack of confidence in the company’s long-term prospects and are, therefore, meaningfully negative for Lululemon Athletica Inc in 2025.
How to play Lululemon shares after Q2 earnings
Lululemon’s management is betting on China to offset domestic softness, ramping up marketing spend and expanding its store footprint.
While the brand has gained traction in the region through localised products and community engagement, the increased investment will likely compress margins in the short term.
With operating margins already down 210 basis points in the second quarter and tariffs adding further cost pressure, the profitability picture sure looks bumpy for LULU shares.
In conclusion, investors hoping for a quick rebound in Lululemon stock may be disappointed – this turnaround will take time, and patience may not be rewarded.
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