Lululemon Athletica

The shares of Lululemon Athletica (NASDAQ:LULU) declined nearly 9% to $47.82 per share today. The decline was primarily due to FBR Capital’s stock rating downgrade and price target reduction on Monday.

FBR Capital analyst Susan Anderson downgraded her rating on the Lululemon Athletica’s stock to Underperform from market Perform. She also lowered her price target on the stock to $42 per share from $55 per share.

In a note to investors, Anderson explained that the company could generate strong sales at the expense of margin. According to her, Lululemon Athletica has a strong women customer base. The company gained among men and has potential among kids.

Lululemon Athletica gross margin estimate

However, the analyst said several factors would weigh on Lululemon Athletica’s gross margin more than expected. These factors included the company’s elevated inventories, supply chain issues, mix shift, and fixed-cost de-leverage.

Anderson said, “Our checks have shown significantly higher clearance levels in-store and online over the past few weeks. While we believe TG/BF sales were very strong, our checks showed most people buying the significant amounts of clearance available in stores.”

Based on her observation, Anderson reduced her gross margin estimate for Lululemon Athletica in the fourth quarter to -290 bps. Her 2016 gross margin estimate for the company is +22 bps.

Additionally, Anderson reduced his earnings estimate for Lululemon Athletica from $0.86 per share to $0.70 per share in the fourth quarter. She also lowered her full year 2015 estimate to $1.80 per share from $1.90 per share, and full year 2016 estimate to$2.13 per share from $2.29 per share.

Lululemon Athletica financial results

Lululemon Athletica is scheduled to release its third-quarter financial results on December 9.  Wall Street analysts are expecting the company to deliver earnings of $0.37 per share on $481.78 million in revenue for the quarter.

The company posted a 16% increase in net revenues to $453 million. Its net income was $0.34 per share in the second quarter.

The company warned that its third-quarter margin may decline to around 47% from 50.3% in the same period a year ago.