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Lulu Short-Sellers Got Their Payday, and You Could Be Next

NEW YORK ( TheStreet) -- Lululemon Athletica (LULU - Get Report) Christine Day's timing on announcing her departure as CEO wasn't by accident. By revealing her resignation first, the company had hoped that its report of decent quarterly results would overshadow her loss, or at least provide damage control. Lulu is developing into a strong buy, but not just yet. First, allow me to describe why short-sellers may want to take the money and run.

Just announcing earnings of 32 cents a share, a beat by 2 cents, wasn't enough. The rest of the earnings followed along a similar path. All in all, it wasn't bad, but ho-hum in relation to the bombshell dropped earlier.

Speaking of bombshells, it appears investors were shell-shocked and totally missed Day describing Lulu's international progress. Last quarter's results were an exceptionally successful accomplishment, and short-sellers had better take note also. In China, for example, Lulu expects to have three retail locations open by the end of the year. Using what we know about China's luxury goods market from brands, including Coach (COH) and Tiffany (TIF), we can expect very good things.

Coach receives about one-third of its revenue from sales outside North America, based on the latest earnings announcement in April. China sales are strong, growing about 40% year over year.

Tiffany's China success story offers greater bullishness for Lulu's expansion plans. Tiffany expected sales in the Middle Kingdom to be up 20% before adjusting for currency depreciation (resulting in a tepid 2%).

According to the earnings call, Lulu expanded international operations in retail and online. Notable locations include new retail locations in London, Berlin and Singapore. Lulu's expansion materialized while growing net revenue 21%, compared to first-quarter 2012. Gross margins slipped from 55% of net revenue to 49.4%, a trend on which investors will want to keep an eye.

When reading financial statements and listening to earnings calls, I expect some margin squeeze during a period of rapid expansion. Apple (AAPL) is a superb example. After it introduced more new products than it had in any previous quarter, its margins contracted, and investors without their eye on the ball may have thought that Apple was experiencing price pressure to maintain market share. The Comscore numbers suggest, however, that Apple continues to increase its market share.
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