BTIG moved Lululemon Athletica to a Neutral rating from Buy in a note issued on Friday, citing deteriorating top-line trends, reduced clarity around earnings and uncertainty ahead of an incoming chief executive officer. Analyst Janine Stichter authored the note.
The brokerage's downgrade comes after what it described as a mixed first-quarter performance from the athletic apparel company. Lululemon posted first-quarter earnings per share of $1.69, a slight beat versus consensus, and reported sales of $2.5 billion, representing 4% growth as reported.
Despite the modest beat in the quarter, management signaled that momentum slowed at the end of the period and that this softness has carried into the second quarter. Company guidance now calls for second-quarter revenue to decline 2% to 3% versus consensus expectations of 2.8% growth. BTIG highlighted that this guidance implies the first quarterly sales decline for Lululemon since the COVID-19 pandemic.
Management expects North American revenue in the second quarter to be down in the low double digits, a notable worsening from the prior-year period when North America declined 4% in Q2. In addition to softer near-term sales guidance, the company narrowed its full-year EPS outlook to $10.95 to $11.15 from a prior range of $12.10 to $12.30.
BTIG said it does not believe the fundamental reasons behind Lululemon's current challenges have been fully diagnosed. "We do not believe the root of the challenges has been fully diagnosed, and see the company as being in a holding pattern as we await the arrival of incoming CEO Heidi O'Neill in September," Stichter wrote in the note.
The firm flagged several areas of uncertainty that it says cloud near-term visibility: the underlying source of product underperformance; softer trends in China and other international markets; and whether a planned increase in marketing spend of 50 to 100 basis points will be adequate to arrest declines in store and online traffic.
Stichter added commentary on the path forward: "We see potential for trends to deteriorate further before improving." While the analyst acknowledged that the company has meaningful self-help opportunities and a valuation that appears relatively inexpensive, BTIG said reduced clarity around estimates leaves it more comfortable staying on the sidelines for now. "While we acknowledge significant self-help opportunity and a relatively inexpensive valuation, we see reduced visibility into estimates and remain more comfortable on the sidelines."
What this means
BTIG's adjustment reflects a more cautious stance toward Lululemon amid worsening near-term sales guidance, an earnings outlook trimmed lower and management turnover. The brokerage emphasized the need for clearer identification of the factors behind the slowdown before it would regain conviction in the name.