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Lululemon Net Up, Pants Recall to Hit Sales

Activewear brand on Thursday quantified the cost of its too-sheer yoga pants: up to $67 million in lost revenues.

Lululemon on Thursday quantified the cost of its too-sheer yoga pants: up to $67 million in lost sales.

Christine Day, chief executive officer of Lululemon Athletica Inc., probably fielded more questions than she wanted to Thursday about the firm’s high-profile recall of black Luon yoga pants that were too see-through.

Instead of basking in the fact that Lululemon posted a 48.8 percent jump in fourth-quarter profits on a 30.7 percent gain in revenues, a “disappointed” Day told analysts and investors that she expected the recall would cut first-quarter revenues by $12 million to $17 million. The firm’s lost revenues are projected at $45 million and $50 million for the balance of the year. Day said the Vancouver-based firm anticipates writing off yoga pants that have yet to be delivered for the summer.

The March 1 recall of black pants made from Lululemon’s proprietary technical Luon fabric impacted about 17 percent of its women’s bottoms.

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“I think our first step is to see what is correct or what we can use….Meanwhile, we are working with our suppliers to do some additional testing of any old stock that we have,” said Day, who noted that the second quarter would be the “most impacted,” with same-store gains in the low-single digits or “close to flat.”

For the fourth quarter ended Feb. 3, Lululemon posted net income of $109.4 million, or 75 cents a diluted share, compared with year-ago income of $73.5 million, or 51 cents. Revenues rose to $485.5 million from $371.5 million a year earlier. The brand beat Wall Street’s estimates of 74 cents a share on sales of $482.1 million.

The retailer now expects first-quarter earnings per share of between 28 cents and 30 cents. Wall Street was looking for 40 cents.

On the earnings call, analysts wondered if the issue could have been avoided by stricter quality-control guidelines set by Lululemon’s network of factories. For nearly a decade, the yoga-inspired brand has used Taiwanese supplier Eclat Textile Co., which, according to news reports, defended its manufacturing process earlier this week.

The shipments went through a “certification process which Lululemon had approved,” Eclat’s chief financial officer Roger Lo told The Wall Street Journal, adding the pants were manufactured “according to the requirements” in its contract with the brand.

Day, who didn’t cast any direct blame, said: “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. So, just putting the pants on themselves doesn’t solve the problem. Because it passed all of the basic metric tests and the hand feel is relatively the same. It was very difficult for the factories to isolate the issue and it wasn’t until we got into the store and started putting it on people that we could actually see the issue.”

She offered that the Canadian brand is “holding” all the impacted products because there may be “some treatment solutions” that could solve of the problems.

Lululemon said it has made “significant investments” in regulating dye issues, a problem that Mark Sunderland, a professor of textile engineering and resident expert at Philadelphia University called “common” among activewear brands.

According to Sunderland, it may be difficult for Lululemon to pinpoint whether the problem is caused by dye, fit, finishing or knitting errors, among others.

Either way, the professor said the sheerness problem isn’t an isolated incident, as countless consumers have been complaining on the Lululemon’s Web site for nearly six months about the subpar quality of the black Luon bottoms.

“This has been happening for a while,” he said, dubbing Lululemon’s call to action “surreptitious” as it coincides with financial reporting.

Sunderland said he’s noticed a decline in Lululemon’s quality over the last two years, and said the company probably believed “by changing something” it could keep “profit margins high” without the consumer detecting anything. The problem is that the Lululemon customer is “extremely savvy,” and notices when changes have been made, Sunderland noted.

“They are really looking at the quality of the product versus the money they are spending,” he said of the typical Lululemon customer, who is willing to fork over $100 for a pair of exercise pants.

“Lululemon is a very active company and their customers are very loyal and very outspoken,” Sunderland said. “Lululemon tells its story very well on social media.”

It’s on social media sites where Lululemon’s cult-like following has grown, and it’s also where they converse about their favorite brand. Perhaps an outpouring of negative comments on those sites pushed the firm to finally react, wondered the professor.

“I do still think Lululemon has a lot of brand loyalty,” Sunderland offered. “Their client base may help lift them out of this if they play their cards right.”