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Markdowns Fueled Lululemon's Growth, Sparking Investor Wariness

BY Dow Jones & Company, Inc.
— 9:50 AM ET 09/10/2015


http://stockcharts.com/h-sc/ui?s=LULU


Lululemon Athletica Inc.'s (LULU) sales looked robust. But profits? Not so much.

The yoga-apparel company's shrinking profit margins and ballooning inventories--revealed when the company release fiscal second-quarter results early Thursday--were enough to spook investors. Lululemon's stock was down as much as 9.5% Thursday morning.

Canaccord Genuity Inc. analyst Camilo Lyon said Lululemon looks like it drove sales by marking down its merchandise.

Lululemon reported a 16% jump in sales and a 6% jump in sales at stores open more than a year. The retailer also raised its full-year earnings and sales guidance.

But Mr. Lyon said his firm was worried about the company's sales tactics and surging inventory.

"We believe our concerns around markdowns ... are bearing out," Mr. Lyon wrote in a research note. He predicts that Lululemon will be forced to continue marking down its items because the company reported "explosive inventory growth" of 59%, while sales grew at 16%.

That's potentially good news for Lululemon customers seeking a discount--but could cause the company's earnings to take a further hit in the coming quarter.

Lululemon did not immediately respond to a request for comment.

Lululemon has been attempting to rework its image ever since it was forced forced to recall some of its yoga pants in 2013 for being too sheer.

Until now, the stock had largely been heading up ever since the company's founder Dennis "Chip" Wilson, who resigned from the board in February, sold half his stake -- or roughly 14% -- to the private-equity firm Advent International.

But investors, who had sent the stock up by more than 60% in the past year, may have gotten ahead of themselves. Retail analyst Stacey Widlitz summed it up this way in a Tweet:

this is what happens when love fest precedes earnings $LULU .. one of three reasons we had downward dog in our preview title

-- Stacey Widlitz (@StaceyRetail) September 10, 2015

Indeed, Lululemon's stock had sold off heading into earnings season. The stock was down 2.5% for the week as of Wednesday's close.

Mr. Wilson's sale of that stake gave Advent two seats on the board. It came after Mr. Wilson had engaged in a protracted battle against the company for control of the board and weighed a possible hostile buyout.

Shares were recently down 8.8% to $58.39 in Thursday trading.