This story has been updated from 10:19 am EST for stock price changes.
Lululemon rose 1.5% to $48.18 on Tuesday despite a downgrade to "neutral" from "strong buy" by ISI Group. Analyst Omar Saad noted that the company's quest to transform itself "from unique specialty retailer to aspirational global lifestyle brand may be stalling."
"We believe the company's slowing 'brandsformation' is magnifying the negative effects of the product quality hiccups, supply chain issues, management changes, and negative PR," according to a research note on Tuesday. "Lulu's value proposition of superior product quality and an engaging store experience has been a beacon of light in the dark ocean of specialty retail mediocrity, leading to tremendous profitability and growth until this point. However, we think there is still a major step forward for this company to take, and we worry that Lulu might miss its once-in-a-lifetime opportunity to cement itself as the premium/luxury active lifestyle brand."
Saad noted that he didn't take a more cautious view because "Lululemon's unique brand position and enormous potential remains intact, it is the execution that has been lacking," according to his note. Also, Saad said he believes "there is an unseen floor in the stock, even if trends worsen, given the potential for an accretive takeout by a proven strategic brand portfolio company such as VF Corp. (VFC) or Kering."
Saad said he believes that share price floor is somewhere in the $40 to $50 range. "At those levels, a proven global lifestyle brand builder such as VF Corp (who also has the supply chain chops to address Lulu's product issues) could make a credible play for this unique, still underutilized brand asset," he wrote.
"Shares could stall while the market waits for the new management team to articulate and execute its vision for the brand," the note said. Saad prefers Italian skiwear brand Moncler SpA (which is not listed on U.S. exchanges) as "a better way to play the secular themes of luxury AND active lifestyle in one brand."
Lululemon doesn't report full-year earnings until the end of March, but Saad lowered his 2013 estimates by 7 cents to $1.88 a share and 2014 estimates by 45 cents to $2.05 and 2015 estimates by 60 cents to $2.40. Saad also lowered his price target by $30 to $50.
Sterne Agee analyst Sam Poser also cut his fiscal 2014 earnings estimates by 5 cents to $2.01 a share, 2015 estimates by 13 cents to $2.22 a share and price target by $4 to $43 on Lululemon. Poser already rates Lululemon at "underperform."
"Unfortunately, the saga over the past year, from Luon pants to the CEO's resignation, to the insensitive comments by the LULU's founder appear to have done more damage to the brand and the value proposition than the product and supply chain issues alone," Poser wrote in a note. "We believe that the recent deceleration of traffic, cited by management last week, was more the result of the change in the perception of the LULU brand by those who have not tried it before during New Year's resolution time since a year ago, than the hangover of supply chain and product issues."
Gap shares were rising 2.8% to $38.34 after Sterne Agee analyst Ike Boruchow upgraded the stock to "buy" from "underperform."
Boruchow said the stock is a buy now that his short thesis has played out (the stock is down 17% over the past six months vs. the S&P 500, which is up 10%).
"GPS was a holiday outperformer (1 of just 3 retailers that beat plan), compares are easier in '14, and GPS has the flexibility (SG&A, buybacks) to keep growing the bottom line - even in a tough retail environment," Boruchow wrote in a note. "Hence, we're jumping on GPS as our best value name to own in 2014."
He raised earnings estimates by 4 cents to $2.92 a share for 2014 and by 10 cents to $3.28 for 2015. Boruchow also increased his price target by $6 to $44.
Gap reports earnings on Feb. 27, according to Yahoo! Finance.
Shares of TJX tumbled 3% to $59.99 after Boruchow cut his rating to "neutral" from "buy." Boruchow wrote in a separate note that while TJX's business model remains strong, the stock's risk/reward is becoming less favorable.
"With the stock up 40%+ the past 12 months and trading at an all-time high valuation, the risk/reward has become less compelling," he wrote in a research note. "Investors may be somewhat complacent that TJX will continue to beat numbers, but most retailers that missed holiday cited unfavorable weather in areas where TJX has a meaningful footprint (NE, MW, Canada), while negative reads from furnishings peers don't bode well for HomeGoods. We'd take profits and wait for a better entry point."
Boruchow trimmed his estimates for the company's TJ Maxx and Marshall's same-store sales (commonly referred to as Marmaxx) to 2% from 3% and HomeGoods to 4% from 6%, with flat sales vs. 3% in its Canadian division.
He also cut his price target by $2 to $66 and earnings estimates for the fourth quarter by 3 cents to 82 cents a share. TJX reports on Feb. 26, according to Yahoo! Finance.
-- Written by Laurie Kulikowski in New York.