Sabrina Escobar
Here's the latest fashion newsflash: younger Americans are swapping out skinny jeans for oversize, baggy pants.
That could hurt companies such as Lululemon Athletica while giving a sales boost to denim-based retailers, Barclays says, as shoppers spend less on form-fitting leggings.
Analyst Adrienne Yih noted that this preference is part of a broader shift in consumer silhouettes, which, unlike a short-lived fad, will dictate trend cycles for years to come.
"A silhouette shift is a virtuous cycle in that it can drive not only wardrobe refresh but also multiyear new-dollar spend as the consumer adopts the entire look over several years," she wrote in a note to clients Monday.
Apparel retailers with a strong denim business, such as American Eagle Outfitters, Gap, and Urban Outfitters could be the biggest beneficiaries of the trend, Yih noted. With consumers laser-focused on buying newer, baggier styles, these retailers may start to see higher foot traffic and bigger transaction sizes. Yih has Overweight ratings on all three stocks.
On the flip side, it also means that shoppers may pull back from spending on tighter styles, particularly leggings and athleisure. That's partially why Yih downgraded Lululemon stock to Equal Weight from Overweight Monday, and slashed her price target to $395 from $546.
"In order to make more space for spending on this new trend, we believe that teen and young women may shift their marginal dollar spend away from these categories in which they have significant product pre-existing in their closets or cabinets," Yih wrote.
Long-term, athleisure still has room to run as people continue to prioritize wellness and casual apparel, Yih added, and Lululemon will likely remain a leader in the space. But the shift in silhouettes means the company may need to pivot some of its core offerings to adjust to the new style demands -- and that may take more than a few quarters to execute, she wrote.
Other factors leading to Yih's downgrade include slowing sales growth in the U.S., and a more competitive athleisure landscape, which includes a number of emerging brands such as Alo Yoga and Vuori, as well as existing ones such as Gap's Athleta brand.
Yih's analysis echoes recent comments made by longtime Lululemon bear Randal Konik, an analyst at Jefferies. Earlier in April, Konik noted that interest for wide-leg pants rose 21% year-over-year in 2023, which poses a risk for Lululemon given that this fashion trend is outside of the company's core expertise.
On Monday, Konik published another note, pointing out that Lululemon's sales growth may come under pressure as the craze over the company's "Everywhere Belt Bag" fanny pack starts to die down. Konik estimated that the belt bag drove an additional $630 million in revenue over the past two years. Konik rates Lululemon stock at Underperform with a $240 price target.
That said, many on the Street are still bullish on Lululemon, even though the stock has taken a hit as investors fret about a slowdown in the athletic apparel market. Two-thirds of analysts following the stock rate it a Buy, while 23% have a Hold rating and 11% a Sell rating, according to FactSet.
Lululemon stock dipped 0.5% to $362.75 Monday, while the S&P 500 is up 0.3%. The shares have shed 29% this year.
Write to Sabrina Escobar at sabrina.escobar@barrons.com
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(END) Dow Jones Newswires
April 29, 2024 12:49 ET (16:49 GMT)
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