Lululemon Athletica Inc.’s stock (LULU) experienced a 2% decline on Monday following a downgrade by Wells Fargo. The yoga gear maker’s stock was downgraded from overweight to equal weight, with Wells Fargo citing its decision to “take its chips off the table” after a strong year-to-date run. Despite the recent dip, Lululemon’s stock has still outperformed the S&P 500, rising by 42.6% in 2023 compared to the S&P 500’s 19% increase.
Factors Behind Lululemon’s Previous Upgrade
In January, analysts led by Ike Boruchow at Wells Fargo upgraded Lululemon based on several factors. These factors included anticipated inventory normalization following the holiday season, expected margin boosts from material freight recapture, strong growth opportunities in overseas markets like China, and anticipated reversion to historical valuation norms. The analysts believe that these factors have played out and have contributed to the stock’s outperformance this year.
Wells Fargo’s Preferred Names in Retailing and E-commerce
Wells Fargo recommends focusing on laggard names in the retailing, specialty softlines, and e-commerce sectors. Some examples provided by Wells Fargo include Burlington Stores Inc. (BURL), Bath & Body Works Inc. (BBWI), Gap Inc. (GPS), PVH Corp. (PVH), and Victoria’s Secret (VSCO). According to the bank, Lululemon’s impressive fundamentals over the past two years leave limited room for potential improvements, with the exception of selling, general, and administrative expenses (SG&A). Wells Fargo believes that the market will not reward significant changes in SG&A. Furthermore, Lululemon’s valuation is no longer considered cheap, as multiples are now in line with historical levels.
Wells Fargo’s New Top Defensive Pick: Nike Inc.
In place of Lululemon, Wells Fargo has named Nike Inc. as its new top defensive pick. The bank believes that Nike’s recovery characteristics and self-help story make it a more compelling long-term investment idea for 2024. As a result of this announcement, Nike’s stock saw a 1.3% increase.
Stay tuned for further developments in the stock market as investors keep a close eye on Lululemon and other notable companies in the industry.