Lululemon downgraded by Raymond James on slowing U.S. growth

Investing.com -- Raymond James downgraded Lululemon Athletica (NASDAQ:LULU) Inc to Market Perform from Outperform on lower U.S. growth despite efforts to accelerate innovation. There are concerns over weaker U.S. traffic, which led to disappointing guidance for fiscal 2025.

U.S. growth is expected to be modest, with North America contributing about majority of sales, around 75% of total revenue, limiting overall growth.

“Despite favorable initial reads from recent product launches, the U.S. remains challenged and is only planned to grow modestly in FY25,” Raymond (NSE:RYMD) James said.

Lululemon’s FY25 revenue growth is projected at 5-7%, below Street estimates of 7.5%, while EPS guidance of $14.95-$15.15 trails the consensus of $15.46.

RJ noted Lululemon’s recent product missteps and expects only limited improvement.

Lululemon’s gross margin is projected to decline by 60 basis points to 58.6% due to higher tariffs and deleverage from slower growth. Tariffs, particularly from China and Mexico, are expected to be a headwind.

The company’s SG&A is also set to deleverage by 40-50 bp to 36.0% of revenue, reflecting increased investments in brand building, international growth, and technology.

Lululemon’s international business remains a bright spot, with FY25 guidance implying 14% growth outside North America, compared to 34% growth in FY24.

China grew 46% in Q4, outperforming expectations. The company plans to open 40-45 new stores globally, with a focus on China, and increase square footage by 10% in FY25.

Raymond James highlighted competitive pressures from emerging brands such as Alo and Vuori, making it difficult for Lululemon to regain market share in the U.S.

The firm also noted that while new products could outperform expectations, the U.S. market’s impact on the overall narrative remains a key risk.

Lululemon has more innovation hitting later, but it remains to be seen if it’ll be a game changer.

At the current after-market price of around $307, Lululemon trades at a price-to-earnings ratio of 18.5x FY26 estimates, which Raymond James does not consider particularly low.