While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.
What: Shares of lululemon athletica (NASDAQ:LULU) have sunk 4% so far this morning after Stern Agee downgraded the yoga gear retailer from "neutral" to "underperform."
So what: Along with the downgrade, analyst Sam Poser lowered his price target to $56 (from $75), representing about 19% worth of downside to yesterday's close. While contrarian traders might be attracted to the stock's sluggish action in 2013, Poser believes that recent comments from Chairman Chip Wilson indicate Lulu is alienating its customers and will, in turn, lead to further share-price declines.
Now what: Stern Agee lowered its 2014 EPS forecast for Lululemon from $2.49 to $2.33 and its same-store sales growth estimate from 8.2% to 6%. "Lululemon active-wear pants may not be really good for active use, according to the recent comments of LULU's Chairman Chip Wilson. He said that 'some women's bodies just actually don't work for it [the pants].' He also said that the rubbing of the thighs over time will cause the pilling and poor performance of the product," noted Stern Agee. "Based on our checks and retail experience, we believe that the core LULU customer has been alienated and will begin to look for yoga and active-wear pants from the likes of Nike, Under Armour, Athleta, and numerous other brands." When you couple those headwinds with Lululemon's forward P/E of 27, I'd agree that the risk/reward tradeoff also looks a bit uncomfortable.
Fool contributor Brian Pacampara has no position in any stocks mentioned. The Motley Fool recommends lululemon athletica, Nike, and Under Armour. The Motley Fool owns shares of Nike and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.