March 19, 2013 5:23 pm

Yoga pants reveal Lululemon shortcomings

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Groove pants sit on display at the Union Square Lululemon retail store in New York, U.S., on Wednesday, Sept. 15, 2010. Lululemon Athletica Inc., the Canadian yoga-wear retailer, plans to open about 225 new stores in the U.S. after tripling its cash from operations to $118 million, said Chief Financial Officer John Currie.©Bloomberg

Yoga pants that are too revealing triggered a fall in the shares of Lululemon Athletica, a pricey Canadian exercise brand, after it recalled a batch made of material that was excessively see-through.

The trendy retailer said it had recalled some of its tighter-fitting yoga pants over the weekend – accounting for about 17 per cent of all its women’s pants – after realising that they were made with a fabric that was too sheer.

The announcement late on Monday left it with a pants shortage – which it said would hurt sales – and focused attention on Lululemon’s ability to manage its supply chain. It triggered a 5 per cent fall in its shares to $62.51 in New York on Tuesday.

“Some of our store managers expressed concern over the sheerness of some of our women’s black luon bottoms,” it said late on Monday, adding that customers who had purchased them since March 1 could return them for a full refund.

Luon, the group’s signature fabric, is made from a combination of nylon and Lycra. Lululemon said the problem had not resulted from changing manufacturers and that it was trying to work out what had gone wrong.

But its supplier, Eclat Textile of Taiwan, told Reuters it had followed Lululemon’s design specifications and that the retailer had misjudged customer tastes.

Faye Landes, analyst at Cowen & Co, said it appeared that Lululemon had only noticed the problem when customers reported it to store staff.

“If this is indeed the case, we suspect a serious lapse in Lulu’s supply chain, quality control and vendor management, and specifically in its quality assurance program,” she wrote in a research note.

Lululemon said it expected the problem to reduce its like-for-like sales growth in the current quarter to 5-8 per cent from the 11 per cent it had been on course to hit. The group’s revenues were $1.2bn over the past 12 months.

Last year, some customers complained that colour from some Lululemon clothing bled when it got wet.

Omar Saad, analyst at ISI Group, said that because Lululemon’s supply chain is small, it is hard for the brand to increase sales at more than 25-30 per cent a year without sacrificing quality.

“The company’s tiny supply chain clearly has been overworked to build inventories and chase [sales] growth . . . which likely led to corner-cutting at suppliers and subsequent quality control issues.”

It sourced 13m units of clothing last year versus Nike’s 420m, he estimated.

“It is becoming increasingly clear that Lulu needs to step in and take a more direct interest in its supply chain in order to regain control over its quality,” Mr Saad said.

Ms Landes wrote: “It is clear from the disclosed information that [Lululemon] has not yet gotten to the bottom of the problem (pun intended).”

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