Lululemon shares fall following stock downgrade

Stock market darling Lululemon Athletica Inc. saw its shares fall 5.2 per cent in Friday afternoon trading after an influential firm downgraded the stock in anticipation of slower growth ahead.

Shares in the yoga wear retailer lost $3.85 to $70.41 amid a report from Credit Suisse that downgraded Lululemon's rating to "neutral" from "outperform" citing a likely slowdown in comparative sales momentum and the risk of further merchandise margin pressure.

Lululemon has been a favourite of many investors as it consistently boosted quarterly profits and revenues in an otherwise struggling retail industry.

However, the Vancouver-based company warned last month that it expects slower sales growth in the high single digits from the fourth quarter of 2012, down from 18 per cent comparable-store sales growth in the third quarter.

Credit Suisse expects further slowing in 2013, especially at its "mature" stores in Canada, which comprise 59 per cent of the chain's total sales and have already seen a slowdown in growth.

"With this recent deceleration, our prior thesis for sustained double digit comps is at risk, as it was predicated on mature stores comping high single digits," Credit Suisse analyst Christian Buss said in the report.

He also cites the potential for Lululemon to have to increase discounting both in stores and online a shift in strategy for the retailer that operated on a scarcity model in which it preferred to have customers chase inventory than stock too much.

The company began an initiative in late 2011 to boost its inventories to meet the growing demand of shoppers and appease those who were confident the company could grow faster. The challenge has been for Lululemon to reach a fine balance between having too much inventory on shelves and having too little.

"New and winter product lines appear to have stretched outside of the company's comfort zone, with re-pricing actions, broader discounting, and higher markdown levels than we have historically seen," Buss said.