Lululemon Athletica Inc.’s problem isn’t just that a batch of its black yoga pants were made too sheer and had to be recalled – the popular retailer is now downgrading its financial predictions and watching its stock do a downward dog.
The Vancouver, B.C., company said late Monday that it pulled the women’s pants from its stores and e-commerce sites over the weekend after learning that the material was too revealing. The Luon fabric is produced in Vietnam and Taiwan and made with a mix of nylon and Lycra spandex fibers.
In a lengthy FAQ posted on its website, the chain said it was still investigating how a batch of too-skimpy pants was allowed to reach stores in early March. Lululemon hasn’t changed its manufacturers or ingredient quality since 2004, it said.
Or, in the company’s words:
“The ingredients, weight and longevity qualities of the women’s black Luon bottoms remain the same but the coverage does not, resulting in a level of sheerness in some of our women’s black Luon bottoms that fall short of our very high standards.”
Lululemon is now offering affected customers full refunds or exchanges while also warning of an impending shortage of black yoga pants. The recalled apparel makes up 17% of the women’s pants and crop pants Lululemon sells in stores.
But it’s more than practitioners' poses being affected – Lululemon said the “issue will have a significant impact” on its financials.
The company lowered its expectations for an 11% increase in same-store sales and revenue between $350 million and $355 million for its first fiscal quarter. Now, Lululemon is projecting a 5% to 8% same-store sales range and revenue between $333 million and $343 million.
The company will unveil its fourth quarter and full-year earnings on Thursday. But already, analyst Sam Poser of Sterne, Agee & Leach downgraded Lululemon’s shares to a neutral rating from buy, telling investors to back off until quality-control concerns are alleviated.
Lululemon had been riding a recent surge in demand for women’s athletic wear, along with competitors such as Gap Inc.’s Athleta, Under Armour Inc. and even mass-market retailers such as Forever 21 and Victoria’s Secret.
In early morning trading, Lululemon stock fell as much as 5.9%; as of 9:15 PDT, it was down $3.60, or 5.5%, to $62.30.
COMMENTARY: Could Lululemon spark a new fashion trend: See-through black yoga pants? I have a feeling that we will be seeing a few of these see-through yoga pants somewhere, some place. The ladies look sexy in them, they know it too, and why not show off the goods underneath? It's probably a bad business for Lululemon judging from the recall, but I will be looking out for the see-throughs with apprehension. LOL
Lululemon Sales Strategy: Scarcity and Eavesdropping
In a series of interviews, Lululemon's executives explained the chain's strategy for stoking demand for Wunder Under pants, Scuba hoodies and racerback tanks. Unlike most retailers, Lululemon doesn't use software to gather customer data, doesn't build lots of new stores, doesn't offer generous discounts and purposely stocks less inventory than it can keep on its shelves.
Instead, the Vancouver company stays in close contact with its customers and cultivates a sense of scarcity, and during a time when most retailers have used discounting to drive sales, it uses pricing power to its advantage to keep items flying off the shelves.
The moves are largely the idea of Chief Executive Christine Day, who took the top job in June 2008, and so far they have paid off.
The Lululemon See-Through Yoga Pants Scandal Continues
After customers complained that a batch of the company's signature yoga pants were too transparent, Lululemon tried to make a scapegoat out of the Taiwanese company that manufactures the pants. Bad idea. Said supplier now says the pants were no different than any other batch. The Eclat Textile Company, whose clients include everyone from Gap to Under Armour, said Tuesday that Lululemon had signed off on the shipment, suggesting that Lululemon made the whole thing up. Eclat's chief executive Roger Lo told The Wall Street Journal.
"All shipments to Lululemon went through a certification process which Lululemon had approved. All the pants were manufactured according to the requirements set out in the contract with Lululemon."
Ladies and gentlemen, we have a yoga pants scandal on our hands.
So which one is it? Did Eclat make a bad batch of $100 yoga pants, or did Lululemon just design transparent $100 yoga pants and milk the market for as long as it could? It's really hard to say. When Lo talked to the press, he said that Lululemon hadn't contacted his company about the recall — which is kind of weird since Lululemon effectively blamed Eclat for screwing up the "level of sheerness" during the manufacturing process. (It's worth pointing out that Lululemon also said it was working closely with the manufacturer "to understand what happened during the period this fabric was made.") It's possible that there's a third party, some company that supplied Eclat with the fabric for the pants, clearing it somewhat from the blame. But at this point, this particular incident really is a frustrating finger-pointing match that's left Lululemon out about $20 million in lost sales and a whole lot yogis out of high-priced pants.
Let's get real about this stretchy trousers tale, though. It's pretty obvious that the supplier gains nothing by saddling the blame, however the perhaps unexpected media circus that gathered around this see-through yoga pants scandal highlighted a number of questionable incidents in recent Lululemon history. As a Credit Suisse analyst pointed out in a note to clients that this is Lululemon's "fourth quality control issue in the last year." Not counting this latest debacle, two out of the other three issues involved the sheerness of its fabrics. Clearly, something is up.
Along these lines, other analysts suggested that Lululemon needs to spend more time in Taiwan to make sure the manufacturers' work is up to snuff. No matter whose at fault in the growing list Lululemon's quality control issues, it can't hurt to get to the root of the problem. Then maybe next time, someone will spot the bad batch, before they ship $20 million worth of transparent yoga pants around the world.
Lululemon Does Not Inform Customers Using Social Media
I checked Lululemon's Facebook and Twitter accounts to see if there was any mention of the see-through yoga pants recall, and was very surprised that there was not a single newsfeed post about the recall or how customers were to be compensated for returning any yoga pants covered under the recall. I am not saying that Lululemon is negligent in not posting something about the recall, but it appears to me that they are treating the whole affair as if it never happened.
The Financial Impact Of The Recall
$20 million worth of recalled yoga pants is not a huge amount, considering that it only represents 1.42% of Lululemon's gross revenues ($1.4 billion just reported today) for the fiscal year ending January 31, 2013. However, it's still a public relations disaster, because the company charges premium prices for its yoga pants, and customers expect much better quality and better manufacturing controls to prevent this sort of thing from happening.
The financial fallout of that $20 million yoga pants recall will be felt on Lululemon's bottomline. Lululemon generated estimated net income of $237 million in the fiscal year ending January 31, 2013, so the amount represents 8.4% of net income, and that is very material. No wonder the company's stock declined by 5% on the day that the recall was announced.
Courtesy of an article dated March 19, 2013 appearing in the Los Angeles Times, an article dated March 19, 2013 appearing in The Atlantic Wire and an article dated March 21, 2013 appearing in Fort Mill Times and an article dated March 22, 2012 appearing in The Wall Street Journal