Goldman Sachs lowered its rating on Lululemon Athletica (LULU) from “Buy” to “Neutral”, underscoring operational challenges that are affecting the company’s ability to grow.
Financial analysts also cut their 12-month price estimate for Lululemon to $286.
According to the financial institution, recent operational issues, lackluster new product introductions and an increase in frequent sales promotions have led to a more even balance between potential benefits and risks for Lululemon stock.
Despite declining sales growth in the United States and notable operating errors in the spring, Goldman Sachs previously gave the company a positive outlook.
Lululemon is expected to achieve sequential sales increases in the second half of the year due to improvements in its product lineup and continued introduction of new products, especially the introduction of new materials in women’s leggings.
“However, due to weak operational performance and lack of innovative products, we have reduced confidence in the brand’s near-term sales growth in the US market,” the financial institution said.
“We noted the lack of significant new products over the summer and were not impressed with the introduction and subsequent rapid retirement of the new Breezethrough product line. These factors indicate that the Company’s recent operating performance is more less equal than we thought.”
This reduced confidence in the brand’s near-term sales growth potential in the US market. The financial institution also said that the company’s frequent sales promotions have raised concerns that customers will become accustomed to expecting constant discounts, which could negatively affect growth.
Physical store ratings and HundredX’s exclusive survey data suggest more operational errors, contributing to the cautious stance. Goldman Sachs said: “We do not expect a recovery in sales in the second half of the year and believe that the brand may be more vulnerable to competition and economic factors.”
With few positive expectations anytime soon, Goldman Sachs predicts that Lululemon shares are unlikely to see much price change until the company can show consistent improvement in US sales in full price and a more robust product launch driven by innovation.
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