Jefferies analyst cuts Lululemon, Under Armour stock ratings

Yahoo Finance anchors discuss the athletic apparel sector after a Jefferies analyst downgraded Lululemon and Under Armour.

Video Transcript

- Let's also get to another rating that came out today, which is Jefferies taking aim at athleticewear, broadly, here with two new calls this morning, citing slowing growth in the sector. And the analyst downgrading Lululemon to underperform with a $200 price target and cutting Under Armor to hold with a $10 price target. And for athleticwear, I mean, this has been one of the stronger categories, of course, early onset in the pandemic, as more people were just looking for stretchy fabrics while we were spending more time at home.

But now as we've kind of reemerged in some of the social structures, or office constructs as well, people might be leaning more towards-- we were talking with Levi's last week, Sazi. They might be looking at a Madewell, even. So the jeans category perhaps getting a little bit more love, but you still do more broadly wonder how much for some of the apparel spending, broadly, that consumers might start to pull back on as they're kind of tightening the household budgets.

- I mean, maybe, but like guys, have you been walking around New York City lately and looking at what people are wearing?

- Yeah.

- They are wearing leggings--

- Yes.

- And a sport bra, and that's it.

- Did they get it recently.

- I'm not wearing a sport bra.

- Have they had it since the pandemic.

- No, that's a recent since the pandemic. I feel like that is like the number-- the most common fashion I have seen on the streets of New York City is people wearing like not much, and it's athleisure. I mean, it's summer in New York City, but like-- and you know, I don't know how representative it is. I'm just saying. Yeah, and I don't know that it's Lululemon, to be sure, but I don't know.

- I don't know where you're walking. Where are you walking? Where are these streets? Look, I like this downgrade by Randall Konig. This is a very extensive research report. It's not just five pages of downgrades. First on the Under Armor, he, Randall mentions that CEO risk. They just had a recent CEO change. You wonder who is going to be put in there permanently. $10 price target from Randall Konig on Under Armor, so a cautious take by him.

But also on Lululemon, they note tough sales comparisons coming up, supply chain issues, inventory that perhaps has gotten out of hand relative to sales growth. You have new competitors like Rhone coming into the mix, taking market share from Lululemon. And there you see the chart from Lulu on there. Despite some at least strong past two quarters, you see Lulu's shares trading down off a results like that. And that's indicative of a market that is concerned that growth is likely to fall off a cliff over the next year.

- Well, just to add very briefly here, both of these companies have also acknowledged that they would have to pay more to get inventory just in time for back to school season. And that's going to mean more spending on freight costs, more spending on just making sure that they're able to service because they have more square footage that they operate and more customers, as well, that they serve as, more than any of these other competitive companies that were cited within this report, whether it's Alo, or-- well, Athleta might be the only one competing there. Or Rhone or Vuori.

But at the end of the day, they've still got more footprint, physically, that they need to make sure that they've got inventory in and then on the online side, as well, so that you're not, in this interim period, hitting on the customer value that they're expecting when they come to your website and actually having inventory. That's something where they have continued to spend up to try and get that inventory just in time. It's caused Lululemon to also kind of reframe its own footwear category play, as well, saying we're not going to pay to play in this space, or pay even higher to play in the space, too.

- Although they have said that the demand for the footwear has been pretty good. Speaking of footwear, by the way, as we look at these companies, I think the only one that Randy Konig calls out as liking in this report is Nike, as a stand out more--

- Big sports bra seller right there, Julie, big sports bra seller, Nike.

- Big sports bra selling, yes. I guess all of these companies are.