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.

By Jonathan Berr Mar 20, 2013 9:21AM
These are certainly tense times for Lululemon Athletica (LULU). The maker of trendy yoga apparel is definitely not in its happy place after having to recall its iconic black workout pants because of what the company described as an "unacceptable level of sheerness."

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.

 

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23Comments
Mar 20, 2013 2:31PM
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Anyone who pays $70 - $100 for a pair of yoga pants is an idiot.

Mar 20, 2013 1:46PM
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I need to start going to yoga classes.
Mar 20, 2013 10:11AM
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why not sell the pants to Lingerie Stores. I bet a lot of women would buy them.
Mar 20, 2013 2:45PM
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I don;' feel sorry for them. Clearly, they went with crappy fabric  to make a profit. Their pants are not cheap to buy so there is no excuse other than greed.
Mar 20, 2013 10:09AM
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As long as the level of sheerness of the yoga pants only come in small sizes this should not be a problem. Now if they also made the yoga pants in XL sizes that would be a big problem indeed as blindness could be caused.
Mar 20, 2013 3:02PM
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I can't imagine anyone paying $75-$100 for yoga pants. Get real people!!
Mar 20, 2013 2:44PM
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couldnt tell they were see thru before you bought them?

who cares?

Mar 20, 2013 3:36PM
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Anyone remember when the MSN homepage used to be interesting and useful? Now it's ovary-centric and comes off as a mashup of Redbook, The National Enquirer and Shape. They treat this YOGA PANT story like someone hit the red button and there are nuclear missiles headed our way. The young women of MSN need to get their heads out of their flavored yogurts and look at the world around them. 
Mar 20, 2013 2:20PM
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in fact the thought of them being even more sheer is a turn on
Mar 20, 2013 10:16AM
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If this was all I had to report, I think I would close up shop for good.
Mar 20, 2013 3:29PM
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If you want to support the United States, you shouldn't buy these Canadian/Taiwanese pants at all. 
Mar 20, 2013 3:20PM
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I was hoping for some pics for the spank bank.
Mar 20, 2013 3:23PM
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I have to say I'm disappointed they pulled the pants.
Mar 20, 2013 3:48PM
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Hell, today's woman does not mind showing it all to anyone! not a problem.
Mar 20, 2013 2:20PM
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i dont see what the big fuss is i know whould be very secure in wearing them
Mar 21, 2013 12:43PM
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Honestly, I don't even understand why this question is being asked. Just because one item that they sell was recalled doesn't mean every single thing they sell will be recalled. Of course they'll recover.
Mar 25, 2013 1:14PM
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I have heard many negative things about the parent company, from bad employee practices while on and off "the clock". I think they are a cult fad.
Mar 25, 2013 12:33PM
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So If i paid extra, could I get some of the recalled pants?
Mar 21, 2013 1:39PM
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I commented yesterday on a different site regarding "Unacceptable sheerness" ?? Maybe the ladies should wear UNDERWEAR under their yoga pants?
When I did aerobics at Racquetball World in Fullerton, the COMMON dress for the ladies was:
pantyhose/tights, leotard, socks & shoes.  Some girls would wear a cut off tank top over the leotard. Some wore unitard matching panties outside the leotard.  They didn't mind looking like they were wearing basically a swim suit with shiny pantyhose/tights.
Soooo , what is the big deal / big difference in sheer yoga pants?  
Beats me. 
Yes, and mostly the ladies came to work out, work up a sweat (not pick up dudes) but at the end of the class most were soaked and wet.  Wet makes almost any fabric  'see-thru' kinda opaque. I give up.
Mar 22, 2013 12:10PM
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BFD!!!!!! Some overpriced junk was recalled. Leave it to MSN and the rest of the talking heads to make a big deal about some inane product recall. This is a perfect example of how the stock market is manipulated by so-called news. Most likely, this issue was escalated in the media in an attempt to drive down the share price to benefit the hedge funds trading short. I see this kind of over-reacting BS over and over again while watching the tickers. In a few days, this BS will blow over and the Wall St. fat cats will be laughing their asses off all the way to the bank! Regulations, smegulations! It doesn't matter what the Feds do, Wall Street will find new ways to squeeze the market.
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