Lululemon's see-through yoga pants get yanked

Shares of Lululemon (LULU) were falling this morning after the maker of trendy athletic apparel announced it pulled its iconic black yoga workout pants for women off the shelves. The problem is a manufacturing defect that resulted "in a level of sheerness" that was unacceptable in its Luon pants.

This is a big deal, affecting 17% of all the women's pants sold in Lululemon's stores, and it will have a "significant impact" on financial results, which are set to be released Thursday. Lululemon says it will release more details about the recall at that time.

Not surprisingly, Lululemon slashed its earnings outlook. The company now expects comparable-store sales, a key retail metric measuring performance at stores open at least a year, to gain 5% to 8% in the first quarter, down from an earlier forecast of 11% on a constant-currency basis. Revenue is expected to be $333 million to $343 million, versus an earlier estimate of $350 million to $355 million. Wall Street analysts had forecast sales of $353.66 million.

This represents a rare misstep for Lululemon, whose shares have surged more than 380% over the past five years, fueled by the surging popularity of yoga. Wall Street thinks the stock hasn't found its happy place yet. The average 52-week price target on it is $79.29, more than 20% higher than where it currently trades.

Lululemon CEO Christine Day issued a profuse apology for the mishap, saying in a press release: "We will accept nothing less than the very highest quality we are known for." Among the companies likely to exploit the situation are competitors like Nike (NKE) and Under Armour (UA).

Lululemon isn't sure how the problem occurred because it has used the same manufacturer for its signature fabric since 2004. Customers who purchased black Luon pants after March 1 are welcome to return them for a full refund or exchange. But those looking for Lululemon's popular apparel now may find the pants in short supply, the company says.

Whether this snafu will hurt Lululemon's brand over the long run remains to be seen, but the company is clearly convinced that seeing too much of the customers wearing the defective pants is worse.
 
Jonathan Berr isn't sure whether his chakras are in alignment, but he doesn't own shares of the listed stocks. Follow him on Twitter @jdberr.  

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