Lululemon is the butt of jokes -- again

The bad news about its sheer yoga pants continues, meaning investors should steer clear of the trendy apparel maker.

By Jonathan Berr Sep 16, 2013 10:34AM
Earlier this year, Lululemon (LULU) became the butt of jokes -- pun intended -- after it revealed that customers complained that its best-selling yoga pants were too sheer. The fact that months later these pants are still a problem for the Vancouver–based company is no laughing matter for investors.

Shares of Lululemon traded down last week after the trendy apparel maker disclosed that it was undergoing some "short-term pain" because fall deliveries were as much as three-and-a-half weeks late as it worked to fix its quality control problems. This is not good because leaving summer products in stores too long while waiting for new supplies to arrive could create an excess of fall inventory against a shortened selling season.
Wall Street analysts, who had expected Lululemon to raise its earnings guidance, were stunned that the company lowered its outlook instead even as it reported better-than-expected quarterly results. It now sees profit this year of up to $1.97 per share, versus its earlier projection of $2.01. That was below analysts' expectations  of $1.99.

The setback for Lululemon comes as rivals such as Gap (GPS), Under Armour (UA) and Nike (NKE) have made inroads among its core customers who are willing to pay $60 for stretchy tanktops and $90 for matching pants. Lululemon also is eager to expand, and it has been adding golf and tennis clothing to its stores and will open its first stand-alone store dedicated to men in 2016.

Clothing made by Lululemon Athletica Inc. on display for sale on March 19, 2013 in Pasadena, California (© Kevork Djansezian/Getty Images)Lululemon's road ahead isn't easy. Corporate reputations, which can take years to build, can be destroyed in a blink, particularly if people think companies are taking short cuts when it comes to quality. The sheer pants, unfortunately, weren't Lululemon's first problem along those lines. Customers had previously complained about colors bleeding in their clothes.

To get back in its consumers' good graces, Lululemon may have to discount its products heavily. That will reduce earnings growth, which in turn will affect its stock price. Further complicating matters is the search for a replacement for CEO Christine Day. That's too much uncertainty for most investors.

Lululemon's shares have tumbled 15% over the past year but currently trade a rich price-to-earnings multiple topping 35, making them far too expensive to buy. Sadly, the stock, like the company's merchandise, is headed for the discount rack for a while.

Jonathan Berr does not own shares of the listed stocks. Follow him on Twitter @jdberr.
7Comments
Sep 16, 2013 1:03PM
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forget the business for now , I love the way they show off the womens figure and the women know this . if your underage in school it should not be allowed. But if your adult and you choose to wear such revealing cloths then god bless please continue
Sep 16, 2013 2:23PM
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". . . its core customers who are willing to pay $60 for stretchy tanktops and $90 for matching pants."

 

What is it about their products that makes people willing to spend that kind of money on them? It's obviously not the quality if they're so thin that they're see-through. If it's just because of the trendy name or the exclusive "shopping experience", its core customers are fools. You can get these types of garmets many places for half that price, or even less. Oh well, I guess it just depends on what your priorities are.

Sep 16, 2013 12:40PM
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When retailers such as Lululemon, Abercrombie & Fitch/Hollister, American Eagle, etc. market only to the "beautiful people," i.e. young, white, physically attractive, affluent, liberal teens and twentysomethings (including deliberately outlandish stunts like selling see-through pants and panties with sexually suggestive slogans in little girls sizes), they deliberately deny themselves earnings from other segments of the population as well.  Because of their elitist business model I think they deserve whatever misfortune they get.

 

I am a female in my late 40s who works out everyday and I've hardly "let myself go," but whenever I go into a Lululemon I'm made to feel like I don't belong there.  The last time I went to a Lululemon looking for workout clothes I was with my teenage son, and the salesperson walked up to both of us, looked at my son and said "So, are you looking for a gift for your girlfriend?" 

Sep 16, 2013 11:00AM
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I know as straight guy that just got a job there. Good looking and in really good shape and obviously also a genius.
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