Lululemon Athletica Inc. (NASDAQ: LULU), a leading name in the athletic apparel industry, has seen its stock value plummet by nearly 50% this year, despite reporting solid revenue growth.
The steep decline in LULU’s share price can be linked to a combination of financial pressures, supply chain issues, and several notable analyst downgrades.
First quarter earnings summary for LULU stock
Lululemon’s first quarter earnings report showcased strong financial performance. In its Q1 letter to shareholders, the company reported a total revenue of $2.2 billion, marking a 10% increase from $2.0 billion in the same period last year.
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The company’s net income rose to $321.4 million from $290.4 million year-over-year, and earnings per share (EPS) climbed to $2.54, compared to $2.28 in the first quarter of 2023. The gross margin for the quarter stood at 57.7%, reflecting a slight increase from the 57.5% reported in the previous year.
Commenting on the results, CEO Calvin McDonald stated:
“In the first quarter, we saw strong momentum in our international markets, demonstrating how our brand continues to resonate around the world. Looking ahead, we continue to have a significant runway for growth and are confident in our team’s ability to powerfully deliver for our guests in 2024 and beyond.”
Impact of analyst downgrades on LULU shares
Despite the positive financial outlook for the company, several key analysts have downgraded Lululemon’s stock, contributing significantly to its decline.
After the initial Q1 earnings report, Barclays adjusted its rating from “Buy” to “Hold” and lowered the price target from $546 to $395, pointing to tougher competition and a slowing retail environment.
More recently, on July 25, Citigroup downgraded Lululemon from “Buy” to “Neutral” and reduced the stock’s price target from $415 to $300, citing execution concerns and the paused sales of the Breezethrough collection.
Simultaneously, JPMorgan cut its price target from $457 to $338 and removed Lululemon from its Analyst Focus List, highlighting issues with the sale of new product lines
These downgrades reflect broader concerns about Lululemon’s ability to navigate current market challenges, such as supply chain hindrances and increased competition.
What to look out for in Lululemon’s Q2 earnings?
As investors prepare for Lululemon’s Q2 earnings, there are a few main aspects investors should focus on.
First, revenue growth will be a critical focus as Lululemon forecasts its net revenue to increase by 9% to 10% for Q2. This could restore investor confidence by achieving or exceeding this target.
Additionally, comparable sales growth, both in physical stores and e-commerce, will serve as a prominent indicator of consumer demand and Lululemon’s efficiency with its retail strategies. With a reported 6% increase in comparable sales during the first quarter, investors are only looking for this figure to continue growing, before putting their money in the company.
Lastly, the performance of Lululemon’s global markets, which showed strong growth with a 35% increase in net revenue in the first quarter, will be under scrutiny. With the possibility for the company to grow its international customer base even more will signal successful global expansion and enhance investors’ trust in Lululemon stock.
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