Fraying Lululemon margins disappoint, shares slump 12 percent

Thu Sep 10, 2015 12:10pm EDT
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By Solarina Ho

(Reuters) - Shares of Canadian yogawear retailer Lululemon Athletica Inc (LULU.O: Quote) tumbled on Thursday as results showed margins had narrowed due to higher costs, even as it reported consensus-beating sales and modestly raised its full-year forecasts.

Shares in the Vancouver-based company dived 12.5 percent to $56.04 by late morning. They had initially risen modestly in premarket trading on the raised forecasts and topline results before concerns over the dwindling margins set in.

"You've got inventories that are bloated. You've got margins that are collapsing. And the explanation to all that is less clear," said Canaccord Genuity analyst Camilo Lyon.

"What that leads into is now a disbelief in their ability to recapture the margin levels that they've talked about."

During a conference call with analysts, executives said Lululemon's supply chain was finally running on time or early, but warned that inventories would remain elevated when combined with late product flows from the first half of the year.

Executives also noted that expenses relating to its international expansion efforts, leases, renovations, higher freight costs, and weaker currencies in Canada and Australia - two of its biggest markets - dragged on margins. But they reiterated their expectations for improvement next year.

Gross margin, or revenue less the cost of goods sold, was a softer-than-expected 46.8 percent, down from 50.5 percent a year ago. Lululemon said it expects a third-quarter gross margin of around 47 percent as those hurdles remained.

Chief Executive Laurent Potdevin told analysts on the call that higher markdowns and quality issues were not a problem, but analyst Lyon noted the company will be holding its third consecutive warehouse sale.   Continued...

A woman walks into a store of yogawear retailer Lululemon Athletica in downtown Vancouver, in a June 11, 2014 file photo.  REUTERS/Ben Nelms/Files