The battle between athleisure and wider-leg pants is here. That means more trouble for Lululemon, analyst says.

By Bill Peters

Lululemon, Ulta Beauty get hit with downgrades by Barclays

After the skinny jean's nearly two-decade reign, retailers and clothing makers - like Levi Strauss & Co., Abercrombie & Fitch Co., and American Eagle Outfitters Inc. - say looser fits are getting more popular. Barclays analysts on Monday said that's unwelcome news for two categories that prevailed during and after pandemic lockdowns: athleisure and beauty.

Across a few research notes published Monday, those analysts, led by Adrienne Yih, said that a shift toward wider-leg pants, having first emerged several years ago, was poised for more widespread adoption.

She described a shift from a fashion profile she called "Big Over Little" - that is, a big top, paired skinnier denim - to "Little Over Big," or more form-fitting tops with baggier jeans. Younger shoppers, she said, could redirect their spending accordingly.

Yih said that "given the newness of this emerging silhouette shift, we believe that it has the capacity to potentially redirect teen/young adult female wallet spend from areas in which they are topped up, including arguably athleisure and beauty," Yih said.

With that in mind, along with growing competition and other factors, Yih downgraded both athleisure giant Lululemon Athletica Inc. and beauty-products chain Ulta Beauty Inc. to the equivalent of a hold from buy. However, she said chains like Gap Inc. and Urban Outfitters Inc., stood to benefit from the new trend.

Shares of Lululemon (LULU) slipped 0.2% on Monday. After lagging most of the day, shares of Ulta Beauty (ULTA) rallied at the end of the session to end up about 1%.

The Barclays analysts made their assessment as consumers, saddled by inflation, still show caution on buying new clothing. Retailers, along with clothing and sneaker makers, have tried to bring them back with what executives on earnings calls have generally referred to as "newness."

Demand for athleisure held up through pandemic-era lockdowns as people alternately sat around or worked out more at home. Meanwhile, demand for cosmetics and other beauty products held up as people returned to the office and began going out more.

But along with the possible shift toward "Little Over Big," Yih said Lululemon faced competition from brands like Alo Yoga, Urban Outfitters' (URBN) FP Movement and Vuori. She also cited a sales slowdown in Lululemon's Americas region - its first since pandemic restrictions lifted - and a full-year forecast that showed weaker trends in the U.S.

"We do not consider this to be a brand-health or brand-desire issue, but one of reaching extraordinarily high levels of productivity and profitability while the U.S. macro remains volatile and unpredictable," Yih said. "Growth companies often may 'pause' before reaccelerating growth."

Meanwhile, Ulta Beauty, she said, faces increased competition within physical-store retail. The prospect of slowing sales and increased price cutting, she said, could weigh on results.

"We are moving to the sidelines with a more cautious view on the near term," Yih said. "Longer term, ULTA is one of two specialty multibrand retailers with a best-in-class business model in the secularly growing beauty segment."

Earlier this month, Jefferies analyst Ashley Helgans also noted more intense competition for Ulta - from the likes of Sephora and TJ Maxx parent TJX Cos. (TJX) - along with struggles with its prestige makeup business, as prestige brands get sold in more places.

"The prestige makeup composition at ULTA is heavily weighted towards legacy brands (e.g Clinique, Estee, even MAC, etc), which, while they've been gradually losing share for years, diversification efforts have been unsuccessful," she said. "ULTA's moves to strengthen their brand mix have been misdirected toward small unproven brands, while competition (Sephora) has been relentlessly adding zeitgeist emerging brands some of which are exclusives."

She added: "Also, many of ULTA's prestige makeup brands are now selling direct to off-pricers like TJX. Consumers are shifting purchases to Sephora for the on-trend brands or TJX where they can buy the same brands at ULTA for 1/3 of the price."

-Bill Peters

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

04-29-24 1602ET

Copyright (c) 2024 Dow Jones & Company, Inc.