Lululemon share price and earnings downgraded by bearish analyst

Athleisure brand Lululemon has seen its share price tumble so far in 2022, as consumer confidence slips amid the cost of living crisis. Despite broad market headwinds for consumer discretionary stocks, majority of analysts forecast the company to report positive revenue and earnings growth for the second quarter. However, one analyst has recently downgraded their outlook.  

Analyst forecasts remain upbeat ahead of athleisure brand Lululemon Athletica’s [LULU] second-quarter earnings results announcement on 1 September. Zacks Equity Research show consensus estimates are predicting both bottom- and top-line growth.

Analysts polled by the publication expect Lululemon to post earnings of $1.86 per share for the quarter, which would reflect year-over-year growth of 12.7%, up from $1.65. Revenues are forecast to come in at $1.77bn, representing a jump of 22.1% from the year-ago quarter.

Despite the rosy outlook, the Lululemon share price has fallen 20.6% year-to-date to close at $307.50 on 29 August. The stock has clawed back from a 52-week low of $251.51 on 25 May, but it’s still a long way from its yearly high of $485.83 in November 2021.

The Canadian company, founded by billionaire businessman Chip Nelson in 1998, saw its sales surge during the global pandemic as more consumers snapped up comfy athleisure clothing to wear at home. But as the cost-of-living crisis deepens, stretched consumers may be forced to cut back.

Lululemon beats earnings estimates

In Q1 2022, Lululemon reported earnings of $1.48, which confidently beat the $1.43 predicted by analysts. It also posted revenues of $1.6bn, up 32% year over year, which was a good an indication that customers were prepared to pay for its products, even as price-tags rise amid rising inflation.

The company has beaten estimates in the last four quarters by 14.9% on average, according to Zacks, and looks likely to continue this pattern for Q2. In June, the company upgraded its guidance for fiscal year 2022, predicting sales of between $7.61bn and $7.71bn. It had previously forecast a range of between $7.49bn and $7.62bn. 

Meghan Frank, CFO of Lululemon, said that despite recent supply chain disruptions and inflationary pressures, the company’s “unique approach to innovation” stood it in good stead to anticipate positive results for the full year. Investment in developing trademark high-tech fabrics, like Luxtreme, have helped keep the company’s products attractive.

Lululemon’s total revenue is made up from two core parts of its business: retail stores, of which it has 579 worldwide (324 in the US alone), and online sales; it also sells products in yoga studios and fitness centres.

Renowned for its innovative athleisure clothing, the company has gradually expanded beyond niche yogawear for women into a global brand that also sells menswear, lifestyle accessories and footwear.

Analyst bearish on Lululemon stock

Despite another likely robust earnings performance, analyst Randal Konik at Jefferies gave Lululemon stock an ‘underperform’ rating in July, recently adding that investors should ‘sell’ the shares. Jefferies’ $200 price target would be a hefty 34.9% downside from the stock’s close on 29 August. 

Jefferies’ team said that while short-term prospects were good, they modelled “low sales and earnings forecasts” within three to five years, as markets worsened and competition increased. In the July note, analysts said: “We are witnessing slowing spending trends across low- and high-income demos broadly.”

This isn’t a view shared by all. Virtus analyst Joe Terranova disagreed with Jefferies’ downgrade, telling CNBC: “Lululemon is an idiosyncratic growth story. It’s being catalysed by innovation.”

Whether Lululemon remains a market leader may depend on growing competition from names like Gap’s Athleta label, Under Armour and stalwart sports brands including Nike and Adidas.

In general, analysts remain bullish on Lululemon’s prospects. At CNN, 28 analysts offering 12-month forecasts have a median target of $376.50, which would be a 22.4% increase from the stock’s 29 August close. The consensus among 32 analysts is to ‘buy’ the stock, with 17 giving this rating, three an ‘outperform’, 10 ‘hold’ and one each ‘sell’ rating and one ‘underperform’ recommendation.