UPDATE 3-Fraying Lululemon margins disappoint, shares slump 12 percent

(Adds details from conference call, comments, market reaction,
analyst comment)
By Solarina Ho
Sept 10 (Reuters) - Shares of Canadian yogawear retailer
Lululemon Athletica Inc LULU.O 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. ID:nWNAB089XP
"I don't think they've ever done that in the past," he said.
Total comparable store sales rose 11 percent on a constant
dollar basis in the second quarter.
The company raised its earnings forecast for the current
fiscal year modestly to $1.87-$1.92 per share from $1.86-$1.91
and its revenue forecast to $2.03 billion-$2.06 billion from
$2.0 billion-$2.05 billion. ID:nBw1Ptjgha
Analysts, on average, expect a profit of $1.93 per share on
revenue of $2.03 billion, according to Thomson Reuters I/B/E/S.
Lululemon's net income fell to $47.7 million in the quarter
ended Aug. 2 from $48.8 million a year earlier. Earnings per
share, however, rose to 34 cents from 33 cents as there were
fewer shares outstanding.
Revenue grew about 16 percent to $453 million.
Analysts on average had expected earnings of 33 cents per
share on revenue of $445.8 million.