Talk about a fall from grace. The once high-flying athletic apparel retail stock Lululemon Athletica (LULU 2.83%) is down a queasy 43% year to date. The slowing revenue growth rate the company revealed in its first-quarter earnings report spooked many investors, and quite a few remain on the sidelines.
Among Lululemon’s bears is one analyst who cut his price target on the specialty retail stock from his already low level. Was this deserved, or are the shares currently oversold?
A $20 cooldown
The prognosticator wielding the pair of scissors was Jefferies‘ Randal Konik. He reduced his Lululemon fair value assessment to $220 per share from his previous level of $240. In doing so, he maintained his underperform (read: sell) recommendation on the stock.
The crux of Konik’s argument is that the apparel and accessories markets have low barriers to entry and constant competition, particularly from hungry up-and-coming players.
The analyst cited the example of Coach, the handbag maker and core brand of Tapestry. He wrote that the company “was a well-known brand with a strong revenue base in the early 2010s; however, Michael Kors rapidly grew across the marketplace, resulting in a valuation rerating for [Tapestry] over the coming years.”
In his view, the same could very well happen to Lululemon, which seems poised to struggle against young and determined early-stage athletic apparel makers.
Fallen star
Lululemon was a star stock in the retail industry for years thanks to its ability to stay on top of the athleisurewear market — a space it continues to dominate, by the way. Yes, top-line growth isn’t what it used to be. But it’s hard to maintain a hot pace when your business swells to nearly $10 billion in revenue annually.
True, Lululemon’s long stretch of popularity has left it a touch expensive in terms of its valuations, even after the price swoon of recent months. In my opinion, though, I don’t think those valuations are lofty enough to justify Konik’s aggressively low(er) price target; rather, I think the shares are a hold if anything.
Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Jefferies Financial Group and Lululemon Athletica. The Motley Fool recommends Tapestry. The Motley Fool has a disclosure policy.