Jefferies lowered its price target on Lululemon Athletica Inc (NASDAQ:LULU) ahead of the company’s fourth quarter earnings, citing leadership uncertainty, governance tensions and rising competition as key concerns that could keep the stock under pressure.
The firm cut its price target to $170 from $185 and maintained a ‘Hold’ rating. Shares traded hands at $160 on Monday afternoon, implying modest upside to the revised target.
In a note to clients, the analysts said near-term financial results are not the primary focus following the company’s earlier pre-announcement at the ICR Conference.
“Q4 numbers don’t matter given pre- at ICR. What matters: no CEO, founder dislikes the board, product remains off-base, company culture in tatters, and EPS remains too high,” the analysts wrote, adding that competition continues to intensify while broader apparel trends shift.
The brokerage argued that leadership uncertainty is one of the most pressing issues facing the athletic apparel retailer. “Who will lead this company?” the analysts asked, saying the brand needs a chief executive with strong product instincts who can reconnect with employees and customers. The note said the firm would prefer a leader with product experience, “think of what Fran Horowitz did for Abercrombie & Fitch.”
Jefferies also pointed to potential governance tensions, noting criticism of the board by the company’s founder and suggesting that a proxy battle could emerge later this year. “The founder has a point. The board is stale and intertwined,” the analysts wrote.
Data cited by the analysts suggests demand trends may already be weakening. Foot traffic turned negative in the fourth quarter according to analytics firm Placer.ai, while observed sales declined 14.3%, based on estimates compiled using data from Bloomberg, signaling weaker conversion.
Jefferies noted that the company’s financial profile may also normalize as the business adjusts. “Sales per square foot are 4x the mall average and margins exceed industry average by roughly 500bps. Those metrics can’t be sustained as the business is retooled ahead,” the analysts wrote.
As a result, the firm believes earnings estimates remain too high and could face significant downward revisions. “It’s clear the company has been overearning,” Jefferies wrote, adding that “earnings revisions to the downside could be severe” before the stock can regain momentum.
The analysts outlined several areas that they believe require attention, including company culture, product assortment, pricing and store strategy. They said the brand should refocus on its athletic and athleisure roots rather than expanding too broadly into categories such as sweaters, skirts or blazers, while ensuring quality remains consistent. The firm also flagged oversized store locations and a heavy reliance on China as areas that may need to be addressed.
The analysts concluded that a turnaround could take time. “There is a lot of wood to chop here and not an easy fix,” the analysts wrote, adding that brand momentum has weakened while competition continues to grow. Until a new CEO is appointed, the board situation becomes clearer and earnings expectations reset, the firm believes the stock is likely to remain “stuck in neutral with a downward bias.”
Lululemon will report its Q4 earnings on March 17.