BMO Initiates Lululemon at Underperform, Sees More Pain After 81% Rout

BMO Capital Markets initiates coverage with "underperform" rating, warns of prolonged turnaround

BMO Capital Markets this week initiated coverage of Lululemon Athletica Inc. with an "underperform" rating, arguing that the athletic apparel company's recovery will be neither quick nor easy as it loses market share to competitors amid intensifying sales declines.

Analysts led by Kelly Crago said the Vancouver-based company's weak quarterly report and lowered full-year outlook revealed a business in deep distress. Performance continued to deteriorate in both the Americas and China, while emerging brands such as Alo and Vuori gained increasing popularity among younger consumers.

Crago's $70 price target—the second lowest on Wall Street according to Bloomberg-compiled data—implies a decline of approximately 28% from Thursday's closing price.

"The product engine that drove the company for years is very stale because this is a much harder category; athleisure has fallen out of favor," Crago said in an interview, adding that Lululemon's "disconnect with consumers is showing up in the data."

Growing Bearish Sentiment

BMO is the latest bearish voice on the retailer. Since June, at least four brokerages have downgraded their ratings, bringing the total to:

• 6 sell-equivalent ratings
• 29 holds
• 2 buys

The average price target of around $100 is close to Thursday's closing level. The stock has already fallen 53% this year and is down more than 80% from its record high in December 2023.

Sentiment toward Lululemon has weakened this year, with comparable sales in negative territory and investors fleeing athletic apparel stocks due to broader industry weakness, including peers like Nike Inc. and Under Armour Inc.

Outlook and Challenges

BMO expects Lululemon to face further pain as athleisure growth slows and structured fashion, such as denim, returns. Crago's team forecasts fiscal 2027 earnings per share of $6.35 for the retailer, well below the Bloomberg consensus estimate of $9.67. This projection reflects BMO's view that the company needs to cut prices or clear inventory to revive demand, which would squeeze margins.

"The $110 leggings business is their main revenue source; that's why margins are so high," Crago said. "If consumers don't prioritize that category, there will be pricing pressure."

New Leadership

Lululemon's new CEO Heidi O'Neill, a former Nike executive, took office on Tuesday. She is tasked with turning around a business urgently in need of a new vision and direction. Her top priorities include stabilizing the ongoing sales decline and rebuilding the brand image following several high-profile controversies, including the sheer leggings incident and the boycott of the Great Wall yoga event.

Stock Price Outlook

Crago said the stock may bottom out at the $50 level given the lack of visibility into the turnaround and consumer pressure. The shares are currently at an eight-year low.

"The entire sports complex is in free fall, but now the extreme negativity might actually present the most opportunities," Crago said.

Source: Bloomberg