Lululemon Athletica Inc. (LULU-Q) experienced a substantial 18% drop in its premarket share price on Friday, reaching an eight-year low. This follows the company's decision to lower its full-year financial outlook for the second time in as many quarters, projecting sales between $10.35 billion and $10.5 billion for the fiscal year ending in early 2027. This revised forecast is down from June's already reduced outlook, and the company also trimmed its earnings per share expectations. The market reaction indicates growing concern among investors regarding the challenges facing incoming CEO Heidi O'Neill, who is set to take over on September 8.
The decline in Lululemon's performance is attributed to several factors, including shrinking margins, a worsening brand perception, and intensified competition from newer rivals like Alo Yoga and Vuori. The company reported a significant 8% year-over-year decline in revenue in the Americas, its largest market, a stark contrast to the 1% increase seen in the previous year. Furthermore, sales in China, typically a growth area, fell 2% in constant dollars, compared to a 24% rise a year ago. Executives cited a lack of fresh and compelling products, along with recent marketing missteps, as root causes for the sluggish sales, noting a 20% decline in sales of its core leggings.
Analysts have reacted by lowering price targets for Lululemon's shares, with Piper Sandler setting a Street-low target of $80. Brian Nagel, an analyst at Oppenheimer Research, stated that the "decidedly downbeat quarterly announcement is now apt to unnerve meaningfully even longer-term-oriented investors." Morgan Stanley also warned that sales could further deteriorate in the second half of the year due to limited visibility on demand recovery, raising concerns about continued margin pressure. The company's market share in the athleisure sector has also diminished, shrinking by 10 percentage points to 43.9% in August, while Alo and Vuori gained 5.9 and 2.2 percentage points, respectively.
Heidi O'Neill, a former Nike executive, faces the daunting task of reviving demand in North America and restoring overall growth. Her prior experience includes four decades of turnaround management and building direct-to-consumer businesses. However, analysts like Patrick Ricciardi of Third Bridge emphasize that product innovation and design are more urgent priorities. Mari Shor, a senior equities analyst at Columbia Threadneedle, cautioned that it could take several years for new initiatives to show results, suggesting that investors should await an initial game plan from O'Neill before adopting a more optimistic stance on the shares.
Lululemon's second-quarter revenue was $2.42 billion, falling short of analysts' average expectation of $2.46 billion. The company now expects fiscal 2026 revenue to decline 5% to 7%, a downgrade from its prior forecast of flat to a 1% decline. Fiscal 2026 earnings per share are now projected to be between $9.48 and $9.73, down from the previous forecast of $10.95 to $11.15. The stock's year-to-date decline has deepened to about 41.5%, and if premarket losses hold, Lululemon stands to lose over $2.5 billion in market value. The company's shares trade at about 11.50 times forward earnings, significantly lower than Nike's 20.76 and Adidas's 13.41.
