Lululemon's Stock Soars as 16 Banks Raise Their Price Targets. Sell Into the Rally, Says One Bear

Lululemon Athletica Inc. saw its stock surge 16.9% on Friday as analysts responded to its better-than-expected third-quarter earnings and raised guidance by significantly increasing their price targets. The results alleviated concerns about the company losing its brand appeal.

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The stock's performance marked its largest single-day gain since October 30, 2008, when it jumped 21.2%, based on Dow Jones Market Data. Lululemon has now posted gains in 11 of the past 12 trading sessions, achieving its longest winning streak since October 2023.

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Following the earnings release, 16 of the 38 analysts tracking the stock on FactSet raised their price targets. One analyst set a new Wall Street high of $440, suggesting further room for growth. Stifel analysts, for instance, boosted their price target from $370 to $438, calling the earnings beat "high-quality" and emphasizing the company’s steady revenue and earnings per share (EPS) trends across all regions.

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In a client note, Jim Duffy and his team at Stifel highlighted stable comparable sales trends across regions from the second quarter, dispelling worries about waning brand relevance and competitive pressures. Stifel also pointed to promising new assortments expected in the first quarter of 2025 and a potential resurgence in the women’s apparel segment, noting that while concrete proof remains forthcoming, the company’s strong execution in the latter half of the fiscal year has bolstered its credibility.

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Despite Lululemon’s stock rising about 39% during the fourth quarter, the shares are still down approximately 22% year-to-date, lagging behind the S&P 500, which has gained 27% in 2024.

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One contributing factor to Lululemon’s improved performance has been its shift in color palette. The company moved away from muted tones to a brighter assortment featuring shades like cerulean blue, mauve, and bright pink—a change that appears to resonate with consumers. However, earlier in the year, analysts at William Blair voiced concerns about the company's reliance on color trends after management admitted that sales softness was partly "self-inflicted."

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International sales proved to be Lululemon’s standout performer, jumping 33% and driving overall revenue growth of 9% to $2.40 billion, narrowly surpassing the $2.36 billion forecast by FactSet. Meanwhile, revenue in the Americas rose just 2%, with same-store sales in the region declining by 2%.

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Analysts at Oppenheimer expressed optimism about domestic sales, citing "increasingly clearer signals of domestic sales growth stabilization." They see this as a sign of a brand that is recovering and poised for further growth as new products are introduced. Oppenheimer, which rates the stock as outperform (equivalent to a buy), noted that while recent share price rebounds have been significant, market sentiment remains cautious, as reflected in their discussions with clients.

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In contrast, Jefferies analysts maintained a bearish stance, reiterating their underperform rating and advising investors to sell amid the stock’s rally. Analysts led by Randall J. Konik estimated that roughly 75% of Lululemon's business is underperforming compared to last year, with U.S. same-store sales declining for a second consecutive quarter.

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Jefferies also highlighted growing competition, particularly from rivals expanding their store presence near Lululemon locations. They warned that increasing inventory levels could limit gross margin improvements, while international sales—although currently strong—may not be sustainable in an uncertain macroeconomic environment.

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One concern noted by Jefferies was the slowdown in the men’s segment, which saw growth dip below 10%, raising what they described as a "yellow flag." They also suggested that growth in the accessories segment is largely driven by targeting younger, more trend-sensitive consumers, predicting it could flatten in the near future.

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According to Jefferies, the challenges facing Lululemon are clear: slowing growth in the North American market and within the broader athletic apparel sector, combined with unfavorable fashion trends and the "Law of Large Numbers," will make it difficult for the company to maintain its elevated sales, margin, and EPS growth rates over time.

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Overall, while Lululemon's latest results and guidance have reignited optimism among many analysts, the company still faces challenges in balancing its domestic performance with international growth and maintaining its competitive edge in a crowded market.

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