Yesterday, we took a look at the dismal first-quarter results at Lululemon Athletica (LULU). As the shares went into freefall in the wake of the quarter results and damp outlook, we wondered what analysts had to say…and while we waited, we wondered: would the bullish analysts continue to love the luxury yoga and athletic wear maker as they once had?
Bloomberg News One answer came our way fairly quickly in the form of a report by Brian Tunick of JPMorgan. In an update earlier today, he spared no expense as he downgraded the company to Neutral from Overweight and slashed the price target to $42 from $56. Tunick explains why:
While we've tried to take a somewhat longer-term and global view despite near-term negative sales and EPS revisions, we see the risk-to-reward as skewing negative as the brand: 1) contemplates negative and decelerating store comps against a rising, potentially multi-year investment cycle, and still-superior margins; 2) navigates a CEO and, now, impending CFO transition; and 3) sets out on an accelerating international expansion program (20 stores in Europe and Asia each by year-end 2017) despite a domestic business that continues to battle traffic and assortment issues.
Tunick's change of heart (and thesis) comes from the company's PR blunders and the subsequent decline in customer demand:
When we initiated on Lululemon last fall, it was based on the assumption that core demand for lulu product remained intact in spite of growing competition and execution/public relations missteps in 2013. We thought a positive reception to a new CEO and the "easy" Luon compares in the first half would have been a nice bridge to a looming International roll-out. The deceleration in comparable store sales again in second quarter suggests waning demand on core product and ongoing execution issues at a time during which most of retail has seen a general pick-up.
Despite the downgrade, shares of Lululemon gained 1% to $37.61 today.
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