Wall Street Adds Another Lululemon (LULU.US) Short! After the stock price plummeted 81% from its peak, BMO warns that bitter days are yet to come

The Zhitong Finance App learned that BMO Capital Markets believes that Lululemon (LULU.US)'s loss-making transformation will not be a quick fix or an easy task. The sportswear company is ceding market share to competitors, and the decline in sales continues to deepen. BMO launched rating coverage for the stock this week, giving it a “underperforming market” rating.

According to financial reports, Lululemon's second-quarter revenue fell 4% year on year to US$2.4 billion, lower than market expectations of US$2.46 billion; same-store sales fell 9% after excluding exchange rate factors and fell 10% at a fixed exchange rate. This is the first time since the pandemic recorded a decline of 4.28%. Revenue in the American region fell 8% year over year, and comparable sales plummeted 12%. Adjusted earnings per share were $2.92 (including $0.86 for tariff refunds and related interest contributions), far exceeding market expectations of $1.82, but lower than $3.10 in the same period last year.

At the same time, the company once again lowered its full-year results guidance. It expects revenue for the 2026 fiscal year to be 10.35 billion US dollars to 10.5 billion US dollars, which is lower than the forecast range given in June, and significantly lower than the market forecast of 11.03 billion US dollars; the adjusted earnings per share for the full year are expected to be 9.48 to 9.73 US dollars, which is also lower than the market forecast of 10.84 US dollars. The company had previously lowered its full-year guidance in June, which meant that the full-year performance outlook was lowered for the second consecutive quarter.

A team of BMO analysts led by Kelly Crago said Lululemon's weak quarterly earnings report and lowered full-year results guidance revealed a deeply troubled business. The company's performance is deteriorating in various regions such as America and China, and up-and-coming brands such as Alo and Vuori are increasingly winning the favor of young consumers. Crago's target price of $70 is the second-lowest on Wall Street, meaning that the stock still has room to fall by about 29% from Friday's closing price.

“The product engine that has driven the company's development over the years is very old, because it is a much more difficult category, and sports and leisure style has fallen out of favor,” Crago said. She added that Lululemon's “disconnect with consumers is showing in the data.”

BMO is the latest major bank to bearish on Lululemon. According to aggregated data, since June, at least four brokerage firms have downgraded the stock. Currently, the stock has six “sell” ratings, 29 “hold” ratings, and two “buy” ratings. Although the average target price of about $100 is not much different from the stock's closing price on Friday, the stock has already dropped 52% this year, down more than 80% from the all-time high set in December 2023.

Lululemon's stock price plummeted more than 80% from the 2023 record high

Market sentiment towards Lululemon continued to cool down this year, with investors selling sportswear stocks one after another due to the weakness of the entire industry. BMO anticipates that as the growth of the sports and leisure category slows and structured fashion such as denim makes a comeback, Lululemon will have more bitter days ahead. Crago's team predicted that the retailer's earnings per share for the 2027 fiscal year would be $6.35, far below the market's consensus estimate of $9.67. This forecast reflects BMO's view that the company will have to cut prices or clear products to revive demand, while also squeezing profit margins.

Crago said, “The $110 yoga pants business is the root of their life and the reason why their profit margin is so high. If consumers stop focusing on this category, price pressure will follow.”

Lululemon has appointed a new CEO whose mission is to lead the transformation of a company in desperate need of a new vision and direction. Former Nike executive Heidi O'Neill took office on Tuesday. Her top priority was to stop the continuing decline in sales and reinvent the brand's image. Previously, the company experienced a series of high-profile disputes, including the “See-through Yoga Pants” product accident and a backlash in public opinion caused by hosting yoga events.

Crago said that given the lack of visibility of transformation prospects and financial pressure on consumers, the stock may find a bottom at the $50 level. Currently, the stock price is near its lowest level in eight years. However, she also pointed out, “The entire sportswear industry is in free fall, but the current extremely pessimistic sentiment is probably the time when the opportunities are greatest.”

It's worth mentioning that on Friday, Michael Burry, an investor famous for the movie “The Big Short,” wrote that he had bought Lululemon shares in a big way for less than $100 per share. According to the ranking of positions offered by Bury, Lululemon has the largest number of positions.