Recall Is Expensive Setback for Maker of Yoga Pants
March 22, 2013 by admin
Filed under Yoga Articles
Even novice shoppers know to wiggle around in a pair of pants before you buy them. But that was a lesson that Lululemon Athletica overlooked when it stocked too-sheer yoga pants, leading to a product recall, an expected hit of around $60 million in lost sales, and the risk that Lululemon — a widely envied retailer — has at last given competitors an opening.
The company is recalling yoga pants made with a fabric known as Luon that are overly transparent, which make up about 17 percent of all the Canada-based retailer’s women’s bottoms.
Lululemon’s chief executive, Christine Day, said Thursday that the company did not know exactly why the quality had gone awry, as the pants had passed quality-assurance tests. But she added that “the truth of the matter is that the only way that you can actually test for the issue is to put the pants on and bend over,” which the company did not do until too late.
The consequences could be significant for Lululemon, analysts said. The company redefined the athletic-apparel world, making it no big deal for women to spend $100 on yoga pants and wear them throughout the day. Its stores churn out high sales per square foot, offer amenities like yoga classes and running clubs, and cater to hard-core fans by offering store discounts to yoga instructors in exchange for product feedback.
Since its founding, the company has faced competitors, notably Gap Inc.’s Athleta, which has been opening stores near Lululemons and selling similar products, though at slightly cheaper prices. Boutique brands and major sports brands like Nike and Under Armour have also been eager to expand their reach in this market.
Now, analysts say, they may finally have a shot.
“You can’t afford to be potentially inviting your customer to go somewhere else, especially in this environment,” said Sam Poser, an analyst with Sterne Agee. Yoga pants are a main attraction for Lululemon shoppers, who may not visit the store, or buy multiple items there, he said, if their favorite type is missing.
“One thing can be that important,” Mr. Poser said.
Lululemon first talked about the Luon problems on Monday, and its stock had dropped by 7 percent, to $62.16, during trading on Tuesday.
Analysts hurried to downgrade Lululemon stock, and on Thursday, the company quantified the fallout of the sheer-pants problem as it reported its fourth-quarter earnings. Lululemon said the impact from the damaged inventory and lost revenue would reduce first-quarter earnings by 11 to 12 cents a share and by 25 to 27 cents for the year. The company put the lost revenue at about $57 million to $67 million for this year.
The company’s performance for the year ended Feb. 3 was strong: profit rose 34 percent to $762.8 million, while revenue rose 37 percent to $1.4 billion, and the company said it expected sales of more than $1.6 billion this year. The stock closed slightly up on Thursday at $64.70.
Ms. Day did not specify when revamped Luon pants would be in stores. She said the company was taking steps to improve quality control, such as dedicating employees to work with vendors, adding specifications to the Luon production process and stationing employees at mills to observe production.
The Luon issue comes on the heels of other quality problems. Last summer, the company issued an apology to customers after they complained about the colors of some garments bleeding.
At the time, John D. Morris, an analyst for BMO Capital, conducted consumer research that showed shoppers were upset about “bright colors bleeding when washed, pilling and fraying seams problems.” Mr. Morris said then that “we believe LULU’s recently expanded manufacturing partnerships could be partly to blame in terms of isolating the problem.”
On Thursday, Mr. Morris sent a note to clients saying “the issues may not have a quick fix. We would continue to proceed with caution on the name until quality issues are clearly identified, contained and remedied.”
Competitors have long been circling Lululemon, trying to get a bigger piece of its high-margin business.
Athleta, for instance, has 35 Athleta stores in the United States, compared with 211 Lululemons in North America and Australia, and Gap expects to open another 30 Athleta stores in 2013.
“Everyone has wanted to be in Lululemon’s business for a long time,” said Faye Landes, an analyst at Cowen. She said, however, that Lululemon’s store environment was hard to match, from its offer of free hemming to its activities.
“I’m sure Nike and Under Armour and boutique brands are all talking to their retailers right now about how this is an opportunity, but I think they just can’t replicate what Lululemon does,” she said.
Still, reaction — from blogs and personalities like Jimmy Kimmel — was harsh, and some shoppers seemed to be increasingly wary of Lululemon.
Stacey Hanuska, 34, of Pottstown, Pa., said reading about the Lululemon issues had made her even more of a fan of Athleta.
There, “you can return anything at any time for any reason,” she said. And while she had made some returns, “it’s never been a quality issue,” she said.
