AP Business Writers
POSTED: 02:57 p.m. HST, Mar 19, 2013
LAST UPDATED: 04:59 p.m. HST, Mar 19, 2013
NEW YORK >> Lululemon has yanked its popular black yoga pants from store shelves and online after it found that the sheer material used was revealing too much of its loyal customers.
The see-through yoga garb is the latest in a series of quality glitches that threatens to alienate the retailer's hardcore fan base, which has so far been more than willing to shell out $100 for pants and other athletic garments. These legions of followers have helped Lululemon, founded in 1998, become a billion-dollar business.
Eva Glettner, 33, of Los Angeles is a case in point. Glettner, who has been a devoted fan of Lululemon, said she'll now shop only at Target to buy her yoga outfits.
"You expect a certain quality, and they definitely let me down," Glettner said. "For that price point, it's unacceptable."
Glettner says Target has similar pants for $30. "It's hard enough making a commitment to working out without worrying about whether you are baring your behind."
Lululemon Athletica Inc. said on its website that it first began to understand the extent of the problem on March 11 as part of its weekly call with store managers, who voiced worries about sheerness. Lululemon declined to respond to Associated Press queries about whether the problem was discovered when customers started to return the Luon pants, the latest batch of which went on sale at the beginning of the month.
But Faye Landes, an analyst at Cowen & Co., believes customers reported the problem to store managers, who in turn reported back to management.
"If this is indeed the case, we suspect a serious lapse in (the company's) supply chain, quality control and vendor management and specifically in its quality assurance program," she said.
Investors usually like transparency. But not in this case. Lululemon's stock price slid $3.90, or 6 percent, to $62, before recovering and closing Tuesday at $64.08, lobbing more than $250 million off of its market value in one day. The stock is down 16 percent so far this year, while the broader markets have been hitting multiyear highs.
Lululemon insists that the problem didn't occur because it changed specifications for the clothing or switched suppliers. It warned that the recall could lead to short supplies and will hurt its first-quarter revenue. The Luon pants, made from a combination of nylon and Lycra fibers, are one of the retailer's product staples and account for about 17 percent of all women's pants in its stores. The company is offering customers' full refunds or exchanges.
The debacle marks the fourth quality problem in the last year for Lululemon, according to Credit Suisse analyst Christian Buss — and not the first see-through issue.
First, the Vancouver-based company had sheerness problems with certain swimsuits for spring 2012. And some light-colored pants currently on sale carry this disclaimer: "You may experience sheerness with some of our bright-colored bottoms because of the lightweight nature of the fabric. We recommend you do a couple of Down Dogs in your brightly colored bottoms to ensure you're happy with the fit and coverage." ''Down Dogs" refers to a yoga position. The company also has had problems with bright dyes bleeding.
Until now, Lululemon has been as much a star for investors as it has for yoga devotees. Its shares rocketed from less than $3 in 2009, to more than $81 last May. Analysts expect to get more details when Lululemon posts earnings for the final quarter and full fiscal year on Thursday. But already some Wall Street analysts have downgraded the stock.
"We see some potential that (Lululemon) risks alienating its core customer bases should quality control issues persist," Buss wrote in her note. Based on her own research, Buss said the Luon fabric is sourced from a Taiwanese manufacturer.
Lululemon confirmed through an outside publicist that its sourcing manager for raw materials is at the facilities of the supplier, Taiwan-based Eclat Textile Co.
Still, some marketing experts dismissed the debacle as a temporary glitch and said Lululemon's loyal customers won't switch to rivals like Nike Inc. or Champion anytime soon.
"It's a late-night TV joke, and it's going to pass," said Robert Passikoff, president of Brand Keys Inc., a New York customer research firm. "The issue is closure, contrition and care. Clearly, they're doing everything they need to do."
Lululemon cut its first-quarter revenue forecast as a result of its decision to withdraw the pants. The company now anticipates first-quarter revenue between $333 million and $343 million, down from an earlier estimate of $350 million to $355 million. Analysts polled by FactSet had previously forecast revenue of $352.1 million.
The company also slashed its outlook for first-quarter revenue growth at stores open at least a year to between 5 percent and 8 percent, from 11 percent previously.