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Market Update

Investors Should Stay on the Sidelines of lululemon

After multiple quarters of weak performance, we are increasingly concerned that the brand is permanently damaged at some level.

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Lululemon Athletica (LULU) continues to struggle to put distance between its prior mishaps and recovered profitability. In an athletic apparel market that remains competitive, with new entrants offering merchandise that is equally compelling, we believe it is imperative for lululemon to ensure it is putting its best foot forward in all capacities.

After multiple quarters of weak performance, we are increasingly concerned that the brand is permanently damaged at some level, and that our positive trend rating is threatened. In our opinion, lululemon's lack of an economic moat has become even more evident over recent quarters, as same-store sales have remained negative and the competition has grabbed share of the lucrative athletic apparel market. We will probably tick our fair value estimate down modestly in response to results, but would remain on the sidelines until we gain clarity on the business's recovery and ability to achieve positive same-store sales.

Jaime M. Katz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.