Lululemon Stocks Drop in S&P 500 Amid Sales Worries

Lulu Stock

Amid mounting apprehensions over Lululemon Athletica Inc. (NASDAQ:LULU)’s sales performance, the company finds itself at the bottom of the S&P 500 Index, with its shares plummeting to new lows. The already dim prospects for the activewear giant took a further hit this week with the departure of a key executive, intensifying worries among investors just ahead of its earnings announcement.

Lululemon’s stock nosedived by 10% this week, triggered by the news of Chief Product Officer Sun Choe’s exit and the subsequent restructuring of its merchandising and branding divisions. With a year-to-date decline of 41%, Lululemon stands as the poorest performer in the S&P 500 Index for the year 2024.

This downturn marks a stark reversal for Lululemon, which had previously enjoyed a position of relative strength, consistently outperforming the broader US equity market in recent years fueled by robust consumer demand for its premium leggings and sportswear. However, lackluster annual projections, indications of weakening sales trends in the first quarter, and heightened competition had already been weighing down the company’s shares this year.

Wedbush Securities analyst Tom Nikic remarked that the narrative surrounding Lululemon has significantly deteriorated, suggesting that the company may not sustain the lofty valuation multiples it had achieved in the past. Despite maintaining an outperform rating on the stock, Nikic slashed his 12-month price target to $397 from $492 in response to the organizational shake-up.

Lululemon is scheduled to release its fiscal first-quarter results after the market closes on June 5. Investors are eager for insights into the company’s plans for product development and merchandising, according to Evercore ISI analyst Michael Binetti. Binetti removed Lululemon from his list of top picks following Choe’s departure, although he maintained an outperform rating, citing the company’s international growth potential while expressing less confidence in its short-term trajectory.

Binetti emphasized the importance of Lululemon’s guidance for the current quarter, especially considering the recent softness in US sales trends. John Zolidis, founder of consumer-focused investment adviser Quo Vadis Capital, echoed these concerns, retracting his long recommendation on Lululemon shares and highlighting troubling remarks made by the company during its March earnings call.

Despite these challenges, there are some positive indications for Lululemon. Nikic noted a significant moderation in the company’s discounting activities in May compared to earlier months, suggesting a possible stabilization of trends in the current quarter.

Lululemon is not alone in its struggles within the activewear sector, as consumers tighten their discretionary spending. Nike Inc. (NYSE:NKE) has seen its shares decline by 15% this year as it endeavors to reignite sales growth, while Under Armour Inc. (UAA) shares have dropped by 24% amidst a business restructuring. However, On Holding AG and Deckers Outdoor Corp. (DECK) have witnessed share price gains in 2024 due to robust demand for their sneakers.

Binetti remains optimistic about the sportswear industry, despite recent sales softness, pointing to newer entrants like Deckers’ Hoka sneaker brand and Alo Yoga as catalysts invigorating consumer interest in these categories.

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