That whole yoga pants problem is coming back to bite Lululemon in the (see-through) ass. Earlier this week the company issued a recall on black pants made with its signature Luon fabric, because they were found to be too sheer. After an earnings call with investors yesterday, we now know how the issue is going to affect Lululemon's bottom (haha) line.
Shortly after the recall announcement, the company's stock dropped about 5%--though it gained some of that back yesterday, according to the New York Times. But how will it impact Lulu's profits in the longer term? According to WWD, the retailer projected that it will take a $67 million hit in sales.
That sounds bad, and indeed, Lulu's CEO Christine Day said she was "disappointed," at the news, despite fourth quarter profits being up 48%. But the company will still make a profit in the first quarter--it's just going to be less than what Wall St. predicted. According to WWD: "The retailer now expects first-quarter earnings per share of between 28 cents and 30 cents. Wall Street was looking for 40 cents." As a result, analysts have downgraded Lulu's stock, according to the NYT. And its woes probably aren't over yet.
The pants recall from March 1 might not be the end of it. Pants that are expected in a summer shipment may need to be written off as well because of sheerness issues, meaning a prolonged shortage of black Luon pants in stores, according to the Wall Street Journal. That kind of shortage could mean an opening for other activewear companies like Athleta, Under Armour, and Nike to take some of Lulu's business away. John D. Morris, an analyst at BMO Captial issued the following warning to its clients, according to the NYT: "We would continue to proceed with caution on the name until quality issues are clearly identified, contained and remedied.”
Lululemon CEO Christine Day is still trying to get a handle on those quality control issues, which we noted have been going on for much longer than the March 1 recall. "We are working with our suppliers to do some additional testing of any old stock that we have to see what we can do to flow in, and we won't have those answers probably for the next week or so," Day said on the investment call.
And how the heck did this happen in the first place? "The only way that you can actually test for the issue is to put the pants on and bend over," Day said. "It wasn't until we got into the store and started putting it on people that we could actually see the issue."
Lulu has hired new staff and will be revamping its quality control initiatives. If it gets the quality back to where it was, Lululemon fangirls will probably stick with the brand for the long haul. Mark Sunderland, a professor of textile engineering and resident expert at Philadelphia University, told WWD, "I do still think Lululemon has a lot of brand loyalty. Their client base may help lift them out of this if they play their cards right.”
We bet the whole Lululemon corporate team is doing a few relaxing sun salutations today. Namaste.