BMO Capital Markets has initiated coverage on Lululemon (NASDAQ: LULU) with an underperform rating, indicating that the athletic apparel retailer's turnaround will be neither quick nor straightforward. The company continues to cede market share to competitors while sales declines deepen across its operations.
According to the latest earnings report, Lululemon's second-quarter revenue fell 4% year-over-year to $2.4 billion, missing the $2.46 billion analysts had anticipated. Same-store sales dropped 9% excluding currency effects, and 10% on a constant currency basis — marking the first decline since the pandemic period, against expectations of a 4.28% decrease. Revenue in the Americas region fell 8% year-over-year, with comparable sales plunging 12%.
Adjusted earnings per share came in at $2.92, which included a $0.86 contribution from tariff refunds and related interest, surpassing the $1.82 consensus estimate but falling short of the $3.10 reported in the same quarter last year. Meanwhile, the company once again reduced its full-year guidance, now projecting fiscal 2026 revenue between $10.35 billion and $10.5 billion — below its June forecast range and significantly under the $11.03 billion market expectation. Full-year adjusted EPS is now expected between $9.48 and $9.73, also trailing the $10.84 consensus. This marks the second consecutive quarter of downward revisions to the annual outlook.
The BMO analyst team, led by Kelly Crago, stated that Lululemon's weak quarterly results and lowered guidance reveal a fundamentally challenged business. Performance is deteriorating across all regions, including the Americas and China, while emerging brands such as Alo and Vuori increasingly capture the attention of younger consumers. Crago's $70 price target stands as the second-lowest on Wall Street, implying roughly 29% downside from Friday's closing price.
"The product engine that drove this company for years has become quite stale because this is a much tougher category now, and athleisure has fallen out of favor," Crago noted. She added that Lululemon's "disconnect with consumers is showing up in the data."
BMO joins a growing list of major banks expressing bearish views on Lululemon. Data shows at least four brokerages have downgraded the stock since June, with the stock now carrying six "sell" ratings, 29 "hold" ratings, and just two "buy" ratings. Although the average price target of approximately $100 sits close to Friday's closing price, the stock has declined 52% year-to-date and remains more than 80% below its December 2023 all-time high.
Market Sentiment Continues to Deteriorate
Investor enthusiasm for Lululemon has cooled steadily throughout the year, with shareholders broadly exiting athletic apparel stocks amid industry-wide weakness. BMO anticipates further pain ahead as athleisure category growth slows and structured fashion trends like denim make a comeback. Crago's team projects the retailer's fiscal 2027 EPS at $6.35, far below the $9.67 consensus estimate. This forecast reflects BMO's view that the company will need to discount or clear inventory to revive demand, which would simultaneously pressure profit margins.
"The $110 yoga pants business is their bread and butter and the reason their margins are so high. If consumers stop prioritizing this category, pricing pressure will follow," Crago explained.
Lululemon has appointed a new chief executive officer tasked with leading the transformation of a company in desperate need of fresh vision and direction. Heidi O'Neill, a former Nike executive, assumed the role on Tuesday. Her immediate priorities include halting the sustained sales decline and revitalizing the brand's image, following a series of high-profile controversies including the sheer yoga pants product failure and backlash from a yoga event promotion.
Crago suggested that given the lack of visibility into the turnaround prospects and ongoing consumer financial strain, the stock could find a bottom around the $50 level. The shares are currently trading near eight-year lows. However, she also noted that while the entire athletic apparel sector is in freefall, the current extreme pessimism could paradoxically present the greatest opportunity.
Notably, on Friday, investor Michael Burry — famed for his role in "The Big Short" — revealed that he has aggressively accumulated Lululemon shares at prices below $100 each. Based on position size, Lululemon ranks as his largest long holding.