Shifting Consumer Preferences Continue to Impact NKE and LULU

Several well-known athletic apparel companies, namely NIKE NKE and lululemon LULU, have seen an extended period of poor share performance, both widely underperforming and reflecting some of the biggest laggards in the S&P 500. 

Lululemon Cuts Guidance

LULU shares have faced pressure amid weakening trends in its consumer base, particularly in North America. Quarterly results have highlighted the pressure, with revenues in the broader Americas region down 8% YoY and comparable sales in the region down 12% in its latest quarterly release. The company also lowered its full-year guidance, helping explain the post-earnings plunge.

Lululemon’s YoY sales growth rates were fantastic in recent years before tapering off visibly, with the weak price action fully reflecting the growth cooldown. Please note that the chart below tracks the YoY % change in sales, not actual sales numbers.

The weak results have led to a very bearish earnings outlook, with EPS expectations slashed across the board amid the guidance cut driven by consistently weak quarterly results. The stock remains a Zacks Rank #5 (Strong Sell), and investors would likely be better off staying on the sidelines until the earnings picture shifts positively, which could finally reignite momentum for the beaten-down stock.

Can NIKE Earnings Turn Things Around?

NIKE shares have been weak for several reasons, largely because it hasn't impressed consumers in recent years and the loss of precious shelf space it once had. Competitors have put real pressure on NIKE amid shifting consumer preferences, adding to the tough environment.  

NIKE’s direct-to-consumer (DTC) push a few years back has largely backfired, reducing shelf space and eroding its overall presence. Still, it has been actively rebuilding its relationships with retailers, but regaining the premium shelf space it once enjoyed isn't cheap, and the process does take quite a bit of time.

Sales growth has been quite weak over recent years, reflective of the above-mentioned issues and a big reason for the poor share performance.

The company will report its next set of results relatively soon, near the beginning of October. EPS and sales revisions for the period have been stabilizing in recent months, reflecting at least a small level of positivity heading into the release. That said, growth is still expected to remain in a slump, with consensus estimates suggesting 10% lower earnings on 2% lower sales.

Bottom Line

While lululemon LULU and NIKE NKE shares may look like a discounted opportunity, the reality remains that they’ve faced big issues concerning their consumer bases. Shifting preferences have led to weak quarterly results, and share performance reflects those problems. A turnaround can definitely be in store for each, but results have yet to truly prove a strengthening picture. 

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This article originally published on Zacks Investment Research (zacks.com).

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