Finally, shareholders sue Lululemon over pants recall

The lawsuit alleges that the yoga apparel manufacturer covered up just how sheer the pants were in an attempt to cut costs.

By Jason Notte Jul 3, 2013 5:38PM
Clothing made by Lululemon Athletica Inc. on display for sale on March 19, 2013 in Pasadena, California (© Kevork Djansezian/Getty Images)
 The most surprising part of the lawsuit filed against Lululemon Athletica (LULU) over its sheer yoga pants is that it took this long to file.

Even former Lululemon chief executive Christine Day managed to bolt out the door a full three weeks before a Lululemon shareholder filed suit in U.S. district court in Manhattan on Tuesday.

As a result, the suit accuses the company of defrauding shareholders by hiding defects in yoga pants whose sheerness led to a costly recall, and concealing talks that led to the Day's sudden departure after a nearly six-year tenure.

It's the second lawsuit filed against Lululemon in the nearly four months after the athletic wear retailer recalled women's yoga pants containing its proprietary Luon fabric after determining the pants were a bit too revealing. The most recent suit, however, was filed by Houssam Alkhoury, a Natick, Mass., resident who had bought 7,500 Lululemon shares.

The suit contends that Lululemon, Day, and company founder and chairman Dennis "Chip" Wilson hid defects in the yoga pants. It also accuses them of making the pants that sheer to cut costs and to sell them at a discount to preserve market share. Finally, it claims that before announcing Day's departure on June 10, Lululemon concealed "serious discussions" about her job status and her potential replacement.

Lululemon shares fell 17.5% on June 11 and wiped out about $1.62 billion of market value, according to Reuters and a regulatory filing. That loss wouldn't be nearly as tough to swallow if Lululemon didn't, as the lawsuit alleges, selectively make disclosures that caused its share price to be artificially inflated. That crushed share value once the truth came out.

This is only going to get worse for Lululemon, as the suit seeks class-action status for shareholders between March 21, when full-year results were announced, and June 10.

The Vancouver, British Columbia, company already stated that recalling the pants may reduce profits this year by up to $40 million, especially since those pants just returned to shelves last month.

Prior to that, Lululemon had built a reputation for making clothes that could withstand many years of wear and washes. If that hasn't been washed away by the recent recall, losing either lawsuit may scour away a bit of that trust.

More on moneyNOW

Jul 5, 2013 5:06PM
Why didn't people just try them on? When I go to Banana Republic and try on white slacks, I can see in the dressing room whether they are too see through for my comfort.
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