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TheStreet Open House

Analysts to Lululemon: What Are You Doing?

NEW YORK (TheStreet) - For a company that once had so much momentum behind it, the growing number of mishaps at lululemon athletica (LULU) doesn't bode well for its stock, and analysts are becoming concerned.

Sterne Agee analyst Sam Poser downgraded the yoga and athletic apparel company's stock to "underperform" from "market perform" on Thursday saying the company is "alienating its customer."

"The current valuation of over 27 x 2014 earnings is not sustainable as the company is alienating the customer," Poser writes in a research note. "Recent comments from LULU's Chairman/founder, on top of shear and pilling problems, and the ongoing search for a new CEO lead us to the aforementioned conclusion. We see little risk to current trends but expect SSS deceleration" in 2014.

Poser lowered his 2014 earnings estimates by 16 cents to $2.33 and same-store sales estimates to 6% from 8% growth. He established a $56 price target.

"We believe the care afforded to product quality, innovation, and customer care, which allowed for sales/SqFt of over $2,000 and approximately 25% EBIT margins, has dissipated," Poser adds.

Lululemon continues to have a rough year that is starting to affect the brand. From having to recall pants in March over complaints about sheerness to the surprise resignation announcement by CEO Christine Day in June to more recent complaints about sheerness and pilling on the expensive pants.

But the icing on the cake was founder Chip Wilson's insensitive comments blaming women's bodies for the pilling occurring on yoga pants. "Quite frankly, some women's bodies just actually don't work for it," he told Bloomberg last week.

Shares were trading 4% lower after market open to $66.20 on Thursday. The stock is down 9.5% this year, compared chief rival Under Armour (UA), whose shares have risen 70% this year. Shares of Nike (NKE) and Columbia Sportswear (COLM) that also play in the active wear space have risen 52% and 29%, respectively this year.

"LULU's missteps may open the door for Nike, Under Armour and L Brand's (LTD) Victoria's Secret: All three are increasing focus on LULU's categories and bring tougher competition than LULU is used to," Morgan Stanley analyst Kimberly Greenberger writes in a Nov. 14 note. "The bear case is rivals pressure LULU's 25% EBIT margins more than expected, causing meaningful P/E contraction given 74% of LULU's price is based upon post-2015 growth."

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