Lululemon recap
Lululemon Declares a World-Wide Shortage in the Luon Pants
High-end Canadian yoga apparel retailer Lululemon Athletica Inc. recalled approximately 17 percent of their signature Luon pants due to a manufacturing error with the fabric's transparency. While many news outlets made light of the 'downward dog dilemma,' Lululemon fears the shortage of styles will lead to a possible financial loss of $17 million in revenue, expecting its first-quarter sales guidance to decrease to as much as $343 million from prior guidance of $355 million. John Currie, the company's CFO, however, worries that the second quarter is when the brunt of the blow will hit with sales in established stores will show minimal growth from May to July.
Despite a recent decline in stock price, Lululemon - still having a relatively small store base and a great deal of growth potential outside of North America, online and into other product categories - has managed to maintain considerable support from business insiders. Edward Yruma - an analyst at Keybanc Capital Markets - recommends purchasing shares at this low entry price, commenting: "we expect this most recent issue to further heighten the scrutiny on the supply chain, which could distract from the near-term seeding of international markets." Lululemon has made plans to embark on a major expansion into the European and Asian markets over the next two years.
In the meanwhile, however, Lululemon will need to make serious efforts in North America to regain the trust of its core customer base and prove that its pants are still worth the price. Lululemon has developed a cult following and built a billion dollar business off of a legion of core customers and, as such, will need this support to stabilize a foundation for growth. Buckingham Research analyst John Zolidis stated: “we don't believe [Lululemon] can course correct while maintaining the current growth rate.” While allowing customers to return or exchange Luon pants purchased after March 1, Lululemon's communication strategy seems to be weak and quite questionable. The company has failed to post the recall on its Facebook page, the home page of its e-shop, or fan sites that track its product launches. Credit Suisse analyst Christian Buss points out, “the big risk here is that [Lululemon] alienate[s] their core customer.” Further, Brian Sozzi, chief equities analyst at NBG Productions, commented that “for the first time now [Lululemon has] opened the window for competitors.” The workout wear industry has opened up for brands like Under Armour, Nike Inc., and Athleta by Gap Inc. - all of which sell similar apparel at much lower price points - to increase their market share. Customers are currently irate and frustrated with the poor quality control of Lululemon's defective items, questioning how the company could have allowed this to happen.
Lululemon has yet to identify the cause of this production defect with problems possibly stemming from any of the four manufacturing stages, which involve multiple suppliers. CEO Christine Day still stood by the company's reach for quality, saying: “delivering the top quality our guests expect is a critical factor in our differentiation in the market place.” This, however, may be debatable as the recall is not the first supply chain problem in recent quarters. Last year, there was a dye bleeding issue affecting some bright coloured tops and sheerness problems in other products. Further, there was a scandal in 2007 regarding Lululemon's VitaSea clothing line, which falsely advertised it was made from seaweed fibers to reduce stress and provide anti-inflammatory, antibacterial, hydrating and detoxifying benefits. What does this negligence in quality control say about a company's product value? What message does a lack of ownership in addressing an error tell about a company's involvement in the production process? How does a second quality issue disclosed in less than a year affect a company's overall reputation? Perhaps Lululemon should jump into damage control to avoid another quality control issue and the implications of further market repositioning.
Regardless of the recall, the company released its fourth quarter results today, displaying a net revenue increase of 31% to $485.5 million. Buss notes: "if we strip away this recall, the core business is still healthy, and we have a validation of that with these results.” With sales at $1,800 per square foot as of November 2012, Lululemon was ranked fourth among the most profitable stores in the United States.
Read the Reuters article for further details on the Lululemon dilemma.