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Lululemon stock falls after analyst downgrade: 'It's time for a reality check'

After Lululemon stock (LULU) ripped over the past five years, with shares rising more than 285%, one Wall Street analyst says it's time to reset the lofty expectations for the athleisure retailer.

Shares of the company fell around 1.8% as of midday trading.

“This past year, our biggest concern on LULU has been the bullish expectations of perpetual 20%+ top line growth,” Bernstein analyst Aneesha Sherman wrote in a note to clients on Tuesday. “Now, with pent-up demand running out, a more cautious [North America] consumer, higher promotions, and new categories too small to offset a softer core business, it’s time for that reality check.”

Sherman downgraded Lululemon stock to Underperform and slashed its price target to $290, more than $25 lower than where shares closed on Monday.

According to Sherman, the elevated expectations stemmed from Lululemon's successful digital initiative, the rise in athleisure throughout the height of the pandemic, and the return-to-office wave — all of which pushed the stock higher over the past several years as the company produced a 25% compound annual growth rate.

However, she added, signs of a reset have already begun. Earlier this month, the retailer warned its fourth-quarter margins will likely shrink on a yearly basis. This came roughly a month after the company’s third-quarter earnings sent the stock tumbling more than 12% after missing Street expectations on gross margins.

Consequently, Bernstein is projecting 13% year-over-year revenue growth in 2023 for Lululemon stock, which would be in line with management's projections of reaching $12.5 billion yearly revenue in 2026.

“Bulls believe this to be a lowball that will easily be beaten, but we don’t quite agree,” Sherman wrote. “Should LULU be expected to grow at 2x sector growth when comping against five years of turbo-charged growth, with a more cautious consumer into 2023, and more competition from similar, newer athleisure brands nipping at LULU’s heels? It’s possible but it’s certainly not a lowball target.”

Athletes reveal lululemon athletica's Team Canada uniforms for the Beijing 2022 Winter Olympics, in Toronto, Ontario, Canada October 26, 2021.  REUTERS/Carlos Osorio
Athletes reveal lululemon athletica's Team Canada uniforms for the Beijing 2022 Winter Olympics, in Toronto, Ontario, Canada October 26, 2021. REUTERS/Carlos Osorio

After the explosion of Lululemon’s men’s apparel, the analyst added, a meaningful large new catalyst is unlikely to emerge. Footwear and the company’s at-home workout product, the Studio Mirror, have been popular points of discussion. The Mirror has been “a failure,” according to Sherman, who pointed to the product's negative margins. And the footwear brand isn’t substantial enough either, she argued, representing “well under 5% of sales.”

To seek further growth, Sherman stated that the company would have to risk its “premium brand image” and dive into wholesale for the first time.

“Faced with an insatiable growth slowdown, management has the option to unlock huge TAM [total addressable market] access through wholesale partnerships, both in [North America] and in China,” she wrote. “Will they do it? For now, the answer is no, but if that changes, then it will be a major catalyst to allow to LULU to continue at a 20%+ growth clip for a few more years.”

Josh is a reporter and producer for Yahoo Finance.

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