Following disappointing second-quarter earnings and unexpected headwinds, Baird downgraded Lululemon Athletica (LULU.US) from "buy" to "neutral" on Tuesday, while reducing its target price by 13% to $195.

Baird analyst Mark Altschwager noted in a research report to clients that after further analysis of the second-quarter results, higher near-term earnings uncertainty would overshadow the otherwise attractive valuation levels, making it difficult to continue recommending the stock. He emphasized that Lululemon Athletica's latest product launches may struggle to resonate with high-value core customers, and combined with signs of consumer weakness in the Canadian market, management's recent guidance cannot be viewed as an effective "de-risking" measure.

Altschwager reported that as of September 19, discounted items in Lululemon Athletica's "We Made Too Much" section increased by 77% compared to a year ago. He indicated this represents the highest level in at least two years, slightly up from the previous month. Despite optimism surrounding major product reforms led by the new design team, uncertainty remains regarding the new design direction and market acceptance, with investors needing at least six months to assess the actual effectiveness of these changes.

Additionally, Lululemon Athletica faces multiple risks: slowing economic recovery in the Americas could suppress consumer demand, while tariff pressures and the termination of "de minimis" duty-free policies will further squeeze profit margins.

From a stock performance perspective, shares declined 0.1% to close at $173.33 on Tuesday. Although the stock has rebounded 8.4% since hitting a five-and-a-half-year low of $159.87 on September 12, it remains down 54.7% year-to-date for 2025.

Despite current valuations appearing "attractive" due to the significant decline, Altschwager believes sales uncertainty remains too high to recommend buying. He indicated a preference for entering after confirming the end of the earnings revision cycle, while reaffirming confidence in the brand's long-term value.

Following this downgrade, only 8 of the 34 analysts tracked by FactSet maintain "buy" ratings, representing a 50% reduction from late August. The average analyst target price has plummeted 31% to $187.65 over three weeks, reflecting significantly bearish market sentiment.

**Will Nike-SKIMS Partnership Cast Shadow Over Lululemon Athletica?**

Notably, the same consumer demographic may be more inclined to try Nike's (NKE.US) new activewear series launched in partnership with SKIMS. On Monday, Nike officially announced a strategic partnership with Kim Kardashian's shapewear brand SKIMS to launch their first athletic wear collection, directly competing with Lululemon Athletica, Vuori, Alo, Athletica, and Fabletics, with pricing strategies that pose significant competitive pressure to Lululemon Athletica.

Leveraging Kim Kardashian's powerful influence as an influencer, celebrity, and entrepreneur, along with SKIMS' extensive digital community resources, Nike's partnership is viewed as a potential disruptor in the premium activewear space. Nike shares rose on the announcement, reflecting market expectations for the combination of SKIMS' brand power with Nike's global influence—particularly given that Lululemon Athletica has previously failed to effectively convert this digital community's consumer potential.

In fact, before the Nike-SKIMS partnership announcement, Altschwager had already lowered his fiscal 2025 and 2026 earnings per share estimates for Lululemon Athletica based on more cautious assessments, considering factors including slowing Americas economic recovery, potential tariff impacts, fixed cost deleveraging pressures, and possible increased promotional pressure due to intensifying competition.

However, for Nike to truly capture market share from competitors, it must prove that the SKIMS partnership is not merely a short-term marketing gimmick, but a reliable brand capable of sustainably attracting Lululemon Athletica's loyal customers. Furthermore, while Kim Kardashian's social media influence is undeniable, converting this influence into professional credibility in the athletic space, particularly establishing athletic authenticity among Nike's traditional loyal consumers, may prove more challenging.