Goldman Sachs downgrades its rating Lululemon Athletica (NASDAQ:) from Buy to Neutral, citing “execution challenges” that are impacting the company's growth.
Analysts have also lowered their 12-month price target for Lululemon to $286.
Recent execution issues, lackluster innovation launches and an increase in regular promotional activities have led to a more balanced risk-reward outlook for Lululemon shares, according to the bank.
Goldman Sachs had previously maintained a positive view on the company despite a slowdown in U.S. sales growth and visible execution lapses in the spring.
The expectation was that Lululemon could drive a sequential reacceleration in the second half of the year through improvements in its product assortment and its innovation pipeline, particularly with the launch of new fabrics in women's leggings.
“However, as a result of weaker execution and innovation, we now have waning confidence in the brand's near-term growth prospects in the U.S. market,” the bank said.
“We've seen limited signs of material innovation as we've progressed through the summer, and we were disappointed with the launch and quick phase-out of the new Breezethrough franchise, suggesting that near-term execution is more uneven than we had initially anticipated.”
This has led to a lack of confidence in the brand's near-term growth prospects in the US market. The bank adds that the company's increased promotional activities have also raised concerns that customers are becoming accustomed to expecting regular discounts, further affecting growth.
Store checks and proprietary survey data from HundredX point to further execution errors, adding to the perceived caution in the outlook. Goldman Sachs says: “We no longer expect a second-half inflection in sales growth and believe the brand is likely to be more susceptible to competitive pressures and macroeconomic factors.”
With few bullish catalysts on the horizon, Goldman Sachs expects Lululemon shares to remain range-bound until the company can demonstrate sustained improvement in U.S. full-price sales and stronger product execution based on innovation.
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