Lululemon Downgraded. Decades-Low Valuations Aren’t Tempting This Analyst.

Lululemon stock has shed 54% this year. (Qilai Shen/Bloomberg)

Key Points

About This Summary

• Baird downgraded Lululemon stock to Neutral from Buy, cutting the price target to $195 from $225 due to earnings uncertainty.
• Lululemon faces ongoing pressure in North America from weak demand, increased competition, and uncertain new product success.
• The removal of the de minimis exemption is expected to compress Lululemon’s gross margins by 1.7 percentage points.

Lululemon Athletica is in the doghouse with Wall Street following several quarters of lackluster results. Baird analyst Mark Altschwager doesn’t see things improving soon.

The analyst downgraded Lululemon stock to Neutral from Buy on Tuesday, and cut his price target for the shares to $195 from $225. While Altschwager continues to see long-term value in the stock—particularly given its price to earnings ratio is hovering at its lowest point in over two decades—he believes it’s more prudent to start buying shares when there is “more conviction that the negative earnings revision cycle has run its course.”

“We think the higher degree of earnings uncertainty will overshadow compelling valuation multiples in the near term, making it difficult to defend/recommend shares,” Altschwager wrote in a research note Tuesday.

Both top and bottom lines will be under pressure for the foreseeable future, Altschwager predicts. On the revenue front, Lululemon has seen several quarters of weak demand from the Americas, its largest market, and recent guidance suggest those trends won’t improve for several quarters.

Lululemon’s business in North America has been particularly hard hit by a slowdown in product innovation and an increase in competition—which is only slated to heat up.

Management is planning to release new styles in the spring of 2026 to reignite growth. But as Altschwager notes, “the success of new product innovation is uncertain while competitive pressures remain intense.”

Indeed, Nike announced Monday it plans to launch its collaboration with Kim Kardashian’s Skims brand on Sept. 26 and will eventually scale globally. A preliminary analysis from Piper Sandler analyst Anna Andreeva suggests the collection will be priced 35% lower on key categories than most competitors, including Lululemon, Alo Yoga, and Vuori.

Andreeva notes this poses a risk for ongoing market share losses at Lululemon, especially among younger consumers who already have a strong affinity for the Skims brand.

But sales aren’t the only challenge facing Lululemon—the margin picture is also unclear, Altschwager wrote. At the company’s second-quarter earnings call, management surprised investors by saying the removal of the de minimis exemption —which allowed companies to ship packages into the U.S. duty free if they were valued under $800—would compress gross margins by 1.7 percentage points. Until recently, Lululemon mailed many U.S. orders from its Canadian distribution centers, taking advantage of the exemption.

Altschwager’s downgrade is the latest in a series of negative assessments on Lululemon stock. Its mean rating on FactSet —derived from 34 analyst ratings—switched to Hold from Overweight in early September, marking the first time since October 2011 the stock’s average rating wasn’t Overweight. As of Tuesday, 68% of analysts rate Lululemon a Hold, compared with 44% at the end of July.

Lululemon stock has shed 54% this year, but was ticking up 0.8% to $175.40 Tuesday afternoon.

Write to Sabrina Escobar at sabrina.escobar@barrons.com