Lululemon Athletica Inc. Downgraded For Brand Issues

Lululemon Athletica Inc. Downgraded For Brand Issues
By WestportWiki (Own work) [CC BY-SA 3.0], via Wikimedia Commons

Lululemon Athletica inc. (NASDAQ:LULU) may never be able to recover from the damage it has done to its brand, according to analysts at Sterne Agee. They downgraded the company’s stock from Neutral to Underperform and set a price target of $39 per share.

Damage to Lululemon Athletica’s brand

In their report dated Nov. 14, 2014, analysts Sam Poser and Ben Shamsian said many of the events that happened last year, paired with what they called the “uninspiring tenure thus far” of the company’s new CEO, have done some serious damage to Lululemon’s brand.

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They point out that many of the apparel maker’s previous customers abandoned the brand and that it’s difficult to get them back because of tough competition from Nike Inc (NYSE:NKE) and others. They expect low single digit same store sales to continue through next year. With sales growth expected to be so low, they don’t see a multiple greater than 20 times as making sense.

Brand versus product

The analysts say that most investors who see potential in Lululemon are more focused on the potential improvements in the company’s products. They certainly expect the products to improve but think this is a case of too little too late.

Management said on their second quarter earnings call that the 5% decline in brick and mortar same store sales was the result of “uninspired product offerings” compared to last year’s third quarter. The Sterne Agee points out that the second quarter of last year was when Lululemon Athletica had to remove the see-through Luon pants, and still same store sales in brick and mortar sales rose by 8%.

This is why they think the issue is with the company’s brand rather than its products. They also point to the large number of complaints about Lululemon’s products on its own website, saying that consumers no longer seem to trust the brand.

Competition rises for Lululemon Athletica

The analysts believe Lululemon was a “force to be reckoned with” up until the middle of last year. They believe that the company offered perhaps the best or at least one of the best combination of product and engagement in the entire retail sector.

They add that the issues with the Luon pants, the CEO Christine Day’s resignation, and the “insensitive comments” the company’s founders made pushed many formerly loyal customers away and to competing brands. The analysts believe that before last year, loyal customers didn’t even realize that there were other brands of active apparel for women.

Additionally, they don’t think the level of service in Lululemon’s stores is what it once was, which means the value proposition has deteriorated as well. And while Lululemon’s sales are falling, Nike and Under Armour Inc (NYSE:UA) have both enjoyed doublt digit increases in sales.

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