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Has Lululemon Lost Its Luster?

Lululemon (LULU) - ★★★★ - Ranked #55 in our Q2 2024 Large Cap Holdings

Lululemon Athletica Inc. (LULU), the trendy athletic apparel retailer, has seen its stock plummet by a staggering 33% over the past three months. This sharp downturn comes as a surprise, given the positive outlook we had when we released our Q2 2024 Equity Rankings, assigning Lululemon a twelve-month price target of $485. At the time of our analysis on March 12th, the stock was trading at $466, and we didn't anticipate much appreciation from that level. However, the subsequent one-third loss in value was unexpected.

So, what has caused this dramatic decline? Several factors appear to be at play:

  1. Weakness in the U.S. market: Lululemon's sales in the domestic market have shown signs of slowing down, contributing to the stock's underperformance.

  2. Departure of Chief Product Officer: The unexpected departure of Sun Choe, the company's Chief Product Officer, has raised concerns. Choe played a pivotal role in Lululemon's recent success, and her exit is viewed as a significant loss for the retailer amid the current slowdown.

  3. Disappointing guidance: While Lululemon's fourth-quarter earnings surpassed estimates, its full-year guidance for fiscal 2024 fell short of analyst expectations. The company projected earnings between $14 and $14.20 per share and revenue between $10.7 billion and $10.8 billion, compared to analysts' estimates of $14.33 per share and sales of $10.9 billion.

  4. Waning athleisure trend: Channel checks suggest that some of Lululemon's current designs are staying on shelves longer, indicating a potential shift in consumer preferences as the athleisure trend that was popular during the pandemic begins to wane.

  5. Competition and knockoffs: Lululemon faces increasing competition from brands like Alo Yoga and Vuori, as well as a rise in knockoff products being sold on shopping platforms such as Temu.

  6. Strategic missteps: Analysts believe that Lululemon's entrance into the Mirror business (connected fitness) and footwear sector may have been mistakes, as the company's core competencies lie elsewhere.

Chart: TradingView

From a technical perspective, Lululemon's stock chart paints a bearish picture. The recent sell-off has caused the stock to breach several key support levels and fall below its 50-day, 100-day, and 200-day moving averages. This is a concerning development, as moving averages are commonly used by technical analysts to gauge a stock's trend and momentum.

With the stock trading below these crucial moving averages, it suggests that the broader trend has shifted from bullish to bearish in the near-term. The break below these levels also indicates a potential loss of support from institutional investors and could further exacerbate selling pressure.

Moreover, the stock has sliced through most of its key support levels, indicating a lack of buying interest at those price points. The next critical support level to watch is around $290, a price point that hasn't been tested since March 2023.

If Lululemon's stock continues its downward trajectory and breaches the $290 level, it could potentially open the door for further declines, as technical traders may interpret this as a sign of continued weakness and a lack of a firm bottom.

However, it's worth noting that technical analysis should be used in conjunction with fundamental analysis, as stock prices are ultimately driven by a company's underlying performance and future prospects. Nonetheless, the current technical picture for Lululemon's stock is undoubtedly bearish, and a recovery may hinge on the company's ability to address the challenges it currently faces.

While these challenges have weighed heavily on Lululemon's stock performance, it's essential for investors to conduct their own thorough analysis and make informed decisions. To stay updated on our latest insights, be sure to subscribe and receive our Q3 2024 analysis of the company, scheduled for release in the next month.

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The information provided in this report is for general informational purposes only and does not constitute investment advice or a recommendation to buy or sell any securities. The opinions expressed in the report are our own and are subject to change without notice. We may have a position in the securities mentioned in the report, and we may buy or sell such securities without notice. Any investment decisions made based on the information in this report are solely the responsibility of the recipient. We do not accept any liability for any direct, indirect, or consequential loss arising from any use of this report or its contents.


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