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Weighing Lululemon’s Recall Woes

Will the cult of Lululemon take a hit following the recall of its core black yoga pants?

Lululemon Athletica Inc., the popular high-end maker of trendy yoga clothes, took a few knocks this week after it said Monday that it had to recall black pants making up about 17 percent of its women’s bottoms due to subpar product coming out of its Taiwanese supplier, Eclat Textile Co.

The company’s stock, which topped $70 this month, fell as low of $62 on Tuesday. On Wednesday its stock dipped slightly, shedding 20 cents to close at $63.88.

Eclat, which makes stretchy black Luon pants dubbed the “Wunder Under,” delivered a March 1 batch that was too “sheer,” according to the Vancouver-based company. The product was pulled from its shelves two weeks later, causing Lululemon to issue a statement admitting that the recall would have a “significant impact” on its financial results.

Lululemon, which reports fourth-quarter earnings Thursday, said until March 17, same-store sales were up 11 percent and revenue guidance was anticipated to be in the $350 million to $355 million range for the first quarter. Now it expects same-store sales to rise between 5 percent and 7 percent and for sales to be between $333 million and $343 million.

Wall Street was expecting $349.8 million in sales in the first quarter.

Analysts and media outlets pounced on Lululemon’s misstep, wondering if the brand with the cult following of self-professed “Luluheads” would lose dollars to competitors such as Nike Inc., The Gap’s Athleta and Under Armour Inc. or the host of independent niche yoga brands that have flooded the market in recent years.

“It’s too soon to say honestly, but my suspicion is that [the recall] will have very limited impact on the brand,” said William Blair & Co. retail analyst Sharon Zackfia, who said that the recall impacted only 5 or 6 percent of its overall product.

“The amount of customers touched by this [incident] was very small,” the analyst added. “The biggest issue, if there is any issue, is the lack of product. If they don’t see the ‘Wonder Under’ that they love, do they go somewhere else?”

Despite Wall Street “chatter,” Zackfia said “there’s nothing” in Lululemon’s financials that indicates the brand is losing market share.

“Lulu did about $1,000 per square foot in Canada in the fourth quarter alone, which is roughly three times what an average retailer does in the full year,” the analyst offered.

With stellar same-store sales trends that are up 35 percent on a two-year basis, Lululemon has been one of retail’s stronger growth stories during the downturn.

Nonetheless, the first half of 2013 will likely be somewhat of a humbling moment for Lululemon. Analysts said second-half strategies such as merchandising optimization and the integration of iPads in stores for consumers to order out-of-stock product online would help drive growth.

But in regards to Lululemon’s dearth of Wunder Under pants, Wall Street and Luluheads alike will have to wait for chief executive officer Christine Day to address that issue today — and expect the stock to react accordingly.