Lululemon stock price target lowered to $223 by Morgan Stanley

Morgan Stanley has lowered its price target for Lululemon (LULU) to $223 from $280, citing persistent concerns over the lack of positive comparable sales growth in the Americas and potential for reduced fiscal year profitability guidance, despite the stock's recent 44% decline. While the firm notes that a re-rating is unlikely without improved Americas performance, it maintains an Equalweight rating, suggesting the risk-reward over the next 12 months skews to the upside given the stock's current "overly punitive" 14x forward P/E valuation. This update follows Lululemon's recent Q1 FY25 report, which showed a 7% increase in total revenue to $2.4 billion and rising net income, underscoring the company's steady growth amidst broader market challenges.

Analysis

Morgan Stanley has revised its outlook on Lululemon (LULU), reducing its price target to $223 from $280 while reiterating an Equalweight rating. The adjustment is primarily driven by persistent concerns over the lack of a positive comparable sales inflection in the Americas, a recovery the firm does not anticipate in the second quarter of fiscal 2025. This view is coupled with the expectation that Lululemon's full-year profitability guidance may require a downward revision. This cautious stance comes despite the stock's significant recent underperformance, with a decline of over 44% in the past six months, which has brought its valuation to what Morgan Stanley terms an "overly punitive" 14x forward price-to-earnings ratio. While the firm acknowledges Lululemon's best-in-class margin profile and recent solid performance—including a 7% revenue increase to $2.4 billion and higher net income in Q1—it maintains that a stock re-rating is contingent upon a tangible improvement in Americas sales. Despite the near-term challenges, Morgan Stanley suggests the risk-reward profile skews to the upside over a twelve-month horizon, anchored by the current depressed valuation.

Key Decisions for Investors

• Investors should closely monitor Lululemon's upcoming earnings for any signs of an inflection in Americas comparable sales, as this is the primary catalyst identified for a potential stock re-rating.
• For those with a longer-term horizon, the current valuation at a 14x forward P/E, described as 'overly punitive', may present an attractive entry point, aligning with Morgan Stanley's view of a favorable risk-reward skew over the next year.
• Be aware that despite solid Q1 results, the potential for a downward revision to full-year profitability guidance represents a key near-term risk if regional sales trends fail to improve.