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Lululemon shares pummeled after profit-margin warning

By Julie Gordon and Anet Josline Pinto
People walk past a store of yogawear retailer Lululemon Athletica in downtown Vancouver June 11, 2014. REUTERS/Ben Nelms

By Julie Gordon and Anet Josline Pinto

VANCOUVER/BENGALURU (Reuters) - Shares of Canadian yogawear retailer Lululemon Athletica Inc plunged on Wednesday after it warned that profit margins were unlikely to fully recover until 2017 and cut its full-year earnings forecast.

The Vancouver-based company, which reported a lower-than-expected third quarter profit, said it expects margins to improve gradually as it works through supply chain problems and an inventory build-up.

But Canaccord Genuity analyst Camilo Lyon said frustration over margin recapture being pushed back to 2017 was likely driving the sell-off, as shares tumbled 12.7 percent to $45.51.

Lyon said he also had concerns about whether customers were becoming conditioned to wait for discounts, a sign Lululemon could be losing its pricing power.

"If that's the case, it makes this much more of an average retailer versus an above average retailer," he said.

Once a retail darling, Lululemon has never fully recovered from a high-profile yoga pants recall in 2013, and now faces competition from companies like Nike and Under Armour in the lucrative athleisure market.

Lululemon has responded by opening new stores around the globe, expanding its product offerings, and focusing in on menswear and junior lines.

The retailer will hold two more warehouse sales in the fourth quarter to clear out its markdown items and said its search for an executive to oversee its supply chain was well advanced.

"This year's investment in our product engine and supply chain remain very much on track," Chief Executive Laurent Potdevin said on a conference call. "We're now seeing sequential improvement in product margins."

Gross margin, or revenue less the cost of goods sold, was 46.9 percent, down from 50.3 percent a year ago, as higher shipping costs, expansion expenses and other factors weighed.

Lululemon expects to start seeing sequential improvements in margins in early 2016, but warned it could take longer to fully return to 2014 levels.

"It's likely going to take us a little bit more time, into the first half of 2017, to fully achieve that," said Chief Financial Officer Stuart Haselden.

Lululemon cut the top end of its full-year revenue forecast to $2.04 billion from $2.06 billion, while retaining the lower end at $2.03 billion. It also cut its full-year earnings forecast to $1.81-$1.84 per share from $1.87-$1.92.

On an adjusted basis, quarterly earnings were 35 cents per share, below analysts' average estimate of 37 cents, according to Thomson Reuters I/B/E/S.

Revenue jumped 14.4 percent to $479.7 million, as same-store sales rose 6 percent.

(Additional reporting by Euan Rocha in Toronto and Sneha Banerjee in Bengaluru; Editing by Sriraj Kalluvila, Ted Kerr and Tom Brown)