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Q3 Preview: lululemon athletica (LULU) May Post Second Sequential Gross Margin Decline Since 2006

Shares of lululemon athletica Inc. (Nasdaq: LULU) are trading up about 3.5 percent to $49.41 Wednesday ahead of the company's third-quarter earnings report on Thursday, before the opening bell.

The third-quarter conference call is scheduled for the same day at 9:00 am ET (6am PT); Dial-In: (877) 303-3203.

The Wall Street consensus suggests lululemon will report earnings of $0.25 per share on $235.74 million in sales. For the third quarter of 2010, the company reported earnings of $0.36 per share on $175.8 million in total sales. The company's FY11 guidance calls for comps in the low-to-mid teens range, and earnings of $0.22-$0.24 per share on revenues of $225-$230 million.

Eight analysts rate shares of lululemon as a Buy, while 12 analysts rate the stock as a Hold and two recommend selling the stock. The average price target on shares of LULU is $56; analysts' price targets currently range from $43 to $68.

DA Davidson is forecasting comps will be up 14.6 percent for the quarter, much stronger than the 13.6 percent increase the Street is anticipating. The firm's sales and earnings estimates are relatively inline with expectations: earnings of $0.24 per share on $235.7 million in total sales. Gross and operating margins are estimated to be 54 percent and 23.2 percent, respectively, for the quarter. This would be LULU's second sequential gross margin decline since 2006 as the only other one took place during 2008.

DA Davidson noted since the company's last conference call, the Canadian dollar has fallen 5 percent and the Australian dollar has dropped 6 percent, both headwinds for lulu. Still, the firm calls the development a "speed bump." Other retailers which have already reported earnings for the quarter highlight weaker demand coming from Canada as the country's overall economy continues to lag.

An analyst at the firm said, "Throughout the 3Q and quarter-to-date, we have noted strong product flows to stores with a high level of excitement around expanded product assortments in run, outerwear, seasonal accessories and the new dance line. Also, core fall products such as the Scuba Hoodie remain top sellers."

DA Davidson has a Neutral rating and $61 price target on shares of LULU going into earnings tomorrow morning.

Some of the key focus points for the company's third quarter conference call include how much management will increase its full year outlook and how online sales are trending. The ivivva U.S. online launch will also be important. Another key topic will be whether Canada's high end retail shopper is cutting back due to the current global economic fears.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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