Lululemon Athletica Inc.’s stock LULU, -1.25% fell 2% Monday, after Wells Fargo downgraded the yoga gear maker’s stock to equal weight from overweight, and said it’s taking its chips off the table following a strong year-to-date run.
The stock has gained 42.6% in 2023 so far, outperforming the S&P 500’s SPX, -0.54% 19% rise. Analysts led by Ike Boruchow said there were several factors behind the bank’s upgrade of Lululemon back in January. These included the view that inventories would normalize after the holiday; there was material freight recapture ahead to boost margins; the company was looking at strong growth overseas, specially in China that would boost sales upside; and valuation would revert to historical norms. “Simply put, these factors have played out — likely driving the stock’s outperformance in ’23,” said the analysts. Wells Fargo is of the view that laggard names in the retailing, specialty softlines and e-commerce space, are the ones to own right now, citing as examples, Burlington Stores Inc. BURL, +2.44%, Bath & Body Works Inc. BBWI, +8.88%, Gap Inc. GPS, -0.86%, PVH Corp. PVH, +4.73% and Victoria’s Secret VSCO, -4.77%, among others. “LULU’s fundamentals have been impressive the past 24 months—and as such, they don’t have any “easy” P&L lines to play with (except for SG&A, which we don’t believe the market will reward),” the analysts wrote. “At the same time, valuation is no longer cheap—with multiples back in line with history.” Wells Fargo is now replacing Lululemon with NIke Inc., which it named a new top defensive pick. “We simply believe the recovery characteristics and self-help story now beginning at NKE make for a more compelling long idea into 2024,” said the note. Nike’s stock was up 1.3%.