Bet on Lululemon to restore calm
Chastened by its sheer-pants blunder, the yoga apparel maker needs to improve quality. But investors should remember that's quite doable.
The blunder is no laughing matter for the Canadian company, which has slashed its earnings outlook after pulling the hot-selling Luon pants from its store shelves and website. The recall affected 17% of all women's pants in Lululemon's stores. These pants aren't cheap, costing $70 to $100.
Not surprisingly, shares of Lululemon, which have surged more than 350% over the past five years, slumped 5% at one point after the recall was announced.
Executives at the Vancouver company first noticed the too-sheer-material problem on March 1 and are at a loss to explain how it happened, given that it has used the same supplier, Eclat Textile of Taiwan, for years. And Eclat is striking back at Lululemon, saying the clothes it shipped were not "problematic," according to The Wall Street Journal.
But quality control is a weakness that Lululemon needs to address, particularly given the high prices it charges for its apparel. As The Journal notes, there were also "transparency problems" with some swimwear and some light-colored pants. Colors were also bleeding on some tops.
Consumers are getting fed up. Eva Glettner, 33, of Los Angeles, told the Associated Press that she had been a devoted Lululemon customer but now will buy lower-priced yoga apparel at Target (TGT). "For that price point, it's unacceptable," she said.
Though Glettner's views are understandable, Lululemon may be able to win her back by making a meaningful effort to improve the quality of its products. Apparel making isn't a complicated process, and the company should be able to figure out where things have gone awry. Otherwise, it risks losing market share to rivals such as Nike (NKE) and Under Armour (UA).
For adventurous investors, Lululemon is worth the risk. The average 52-week price target on the stock is $79.29, more than 20% above where it currently trades. The shares aren't cheap, trading at a price-to-earnings multiple of 40.88, but that’s well under their five-year high.
That's why investors need to take a deep breath and think of a calm blue ocean before buying shares of Lululemon because it may take awhile for the stars to come into alignment again for the company. Once that happens, shareholders may not reach nirvana, but they should do pretty well.
Jonathan Berr does not own shares of the listed stocks. Follow him on Twitter @jdberr.
couldnt tell they were see thru before you bought them?
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