Canaccord Raises a Red Flag on Lululemon Athletica inc. (LULU); Here’s Why

Canaccord analyst Camilo Lyon is stepping down from the sidelines on Lululemon Athletica inc. (NASDAQ:LULU) with a new bearish forecast for the athletic apparel giant. From the analyst’s perspective, Lululemon’s eight-year long reign of athleisure apparel trend glory days has sharply come to peak with stacking evidence that growth in 2017 is readying to unravel. The yoga fashion empire’s undoing? A rising preference for denim.

Therefore, on back of “mounting concern,” squarely sizing up multiple compression and an unfavorable risk/reward slanted spiral, Lyon downgrades from a Hold to a Sell rating on LULU while chopping the price target from $65 to $44, which represents a close to 21% downside from where the shares last closed.

Suddenly, “We began hearing of denim gaining momentum at the summer footwear/apparel trade shows, and now more fashion footwear vendors/retailers are speaking to such trends,” the analyst determines.

Lyon explains, “While we respect the company and the infrastructure work management has done to improve its supply chain processes (which has led to significant gross margin recapture), the category headwinds facing LULU that we highlighted last quarter appear to be stiffening. Specifically, we believe the combination of (1) a tough pant wall comparison and the inability to comp last year’s gains, (2) rising in-store inventory levels coupled with an increasing breadth of markdowns online, and (3) an evolving fashion shift away from athleisure to denim will lead to moderating comps and EBIT margin compression now through 2018.”

Growth rates for athletic leisurewear are decelerating from a rate of approximately 7% to now 4%, with competition surging forward against the giant “across all channels of distribution. “We see heightened risk to LULU’s ability to drive MSD comps,” and as every customer who continues to buy one less pair of yoga pants chooses a faithful pair of denim jeans in its place, Lyon sees a challenging, winding path ahead for Lululemon.

According to TipRanks, which measures analysts’ and bloggers’ success rate based on how their calls perform, Camilo Lyon is ranked #2,976 out of 4,239 analysts. Lyon has a 49% success rate and loses 0.5% in his yearly returns. When recommending LULU, Lyon forfeits 15.9% in average profits on the stock.

TipRanks analytics indicate LULU as a Hold. Based on 14 analysts polled in the last 3 months, 6 rate a Buy on LULU stock, 4 maintain a Hold, while 4 issue a Sell. The 12-month average price target stands at $65.55, marking an 18% upside from where the stock is currently trading.screen-shot-12-02-16-at-10-35-pm

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