Given that nearly 40% of people gained weight during the pandemic, it’s perhaps no surprise that in the recovery, comfort is king. That should support ongoing demand for athleisure says Jefferies, although not all stocks will benefit equally, with Lululemon looking ripe for a fall. That’s weighing on the shares Monday morning.
Analyst Randal Konik downgraded Lululemon Athletica (ticker: LULU) to Underperform from Hold, while lowering his price target to $200 from $375. He also cut his rating on Under Armour (UAA) to Hold from Buy, and halved his price target, to $10.
Overall, he still likes the athleisure space, writing that an “increased emphasis on fitness and rising casualization of the workplace helps this sector grow.” However, his concern is that the pandemic “likely pulled forward demand with Lululemon one of the biggest beneficiaries.”
Lululemon was a pandemic winner, but now faces difficult comparisons, Konik notes, while at the same time its recent entry into the footwear market could hurt profits, as shoes tend to carry lower margins than apparel. He is also wary of the ongoing need to invest in its at-home fitness brand Mirror.
Lululemon stock is falling nearly 4% in early trading, to $282.10. The shares are off over 25% this year, even as its most recent earnings, reported last month, came in ahead of expectations.
Yet even with that decline, the shares change hands for about 29 times forward earnings. That’s below their five-year average of 40 times, but still look too pricey to Konik, as he thinks consensus estimates will have to come down, particularly if the company needs to discount excess inventory in the coming quarters.
For Under Armour, he’s concerned about pulled-forward demand as well, but notes that management changes add another layer of risk to the stock.
Konik’s pick in athleisure is Nike (NKE): He reiterated a Buy rating and $155 price target on the shares, citing is dominant position in the global athletic space.