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7 reasons why Lululemon's stock is now a sell: Jefferies

·Anchor, Editor-at-Large
·2 min read
In this article:
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Lululemon (LULU) shares run the risk of getting out of shape, Jefferies Analyst Randal Konik warned in a new note on Monday, as the analyst slashed his rating on the stock to "Underperform" from "Hold."

The veteran retail analyst listed seven reasons for his new cautious stance:

  1. Tough sales comparisons over the next several quarters

  2. Industry supply chain challenges

  3. Rising competition from the likes of Rhone and Gap's (GPS) Athleta

  4. Lackluster performance at the connected-fitness brand Mirror

  5. Increasing sales of new lower-margin footwear

  6. Potential for earnings misses later this year

  7. High relative valuation despite the stock's 40% year-to-date pullback

"While the athletic apparel & footwear sector should continue to grow, COVID likely pulled forward demand with Lululemon one of the biggest beneficiaries," Konik wrote. "As a result, we see risks to consensus estimates ahead as competition rises and headwinds grow."

The analyst added that Nike (NKE) is his top pick in the athletic-wear sector.

To be sure, the downgrade on Lululemon isn't too far removed from cracks appearing in its financial armor.

First-quarter gross profit margins fell 320 basis points (or 3.2%) from a year ago, owing to inflation in raw materials and transportation. Inventory ballooned 74% from last year, much faster than the quarterly sales increase of 32%.

Comparable sales rose 24% in the quarter, cooling from 32% growth in the fourth quarter.

2020/10/17: Canadian sportswear clothing band, Lululemon logo and store seen in Hong Kong. (Photo by Budrul Chukrut/SOPA Images/LightRocket via Getty Images)
2020/10/17: Canadian sportswear clothing band, Lululemon logo and store seen in Hong Kong. (Photo by Budrul Chukrut/SOPA Images/LightRocket via Getty Images)

"While there does not appear to be any slowdown in spending for Lululemon's customer base so far (a higher income demographic), inventories are a little high in our view, particularly if spending trends weaken as the year progresses (and if the spending trends increasingly favor 'going out' apparel)," Citi Retail Analyst Paul Lejuez said in a note to clients.

Shares of Lululemon were down about 3% during Monday's trading session.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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