March 21 (Bloomberg) -- Wall Street analysts from Robert W. Baird & Co. to Sterne Agee & Leach Inc. peppered Lululemon Athletica Inc. executives today with questions about how the yoga-wear retailer is handling a recall of women’s pants for being too transparent.
Lululemon said on March 18 that some shipments of its black Luon pants were too sheer and didn’t meet its standards. The shortage will reduce fiscal full-year earnings by as much as 27 cents a share, Lululemon said today. Analysts asked Chief Executive Officer Christine Day how employees were handling returns, whether the company was changing suppliers and how the pants made it out of the factory in the first place.
“The truth of the matter is the only way you can actually test for the issue is to put the pants on and bend over,” Day said on today’s conference call. “Just putting the pants on themselves doesn’t solve the problem. It passed all of the basic metric tests and the hand-feel is relatively the same, so it was very difficult for the factories to isolate the issue, and it wasn’t until we got in the store and started putting it on people that we could actually see the issue.”
The problem is a challenge for the retailer, which is able to sell $98 yoga pants and $64 tank tops because of its carefully cultivated reputation for quality. Lululemon, which is offering full refunds or exchanges to customers who bought the pants after March 1, has put store employees on “high alert,” hired new quality control executives and is adding suppliers, Day said.
“There’s culpability all along the supply chain here,” Mark Sunderland, a professor of textile engineering at Philadelphia University, said in a telephone interview. “The fact that the pants actually had to reach the customer with the problem, that’s really unheard of.”
It’s possible that Lululemon’s supply chain hasn’t kept up with the company’s rapid growth, said Sunderland, who has consulted on performance gear for companies including Hanesbrands Inc.
Lululemon’s sales have increased by about 30 percent or more for 14 straight quarters, reaching $1 billion for the first time in the year ended Jan. 29, 2012.
The chain also faced issues with bleeding garments last year, which the company apologized for through a letter on its Facebook page in July.
The black Luon pants accounted for about 17 percent of all women’s pants in stores, the company said earlier this week. Lululemon hasn’t identified what caused the pants to be too sheer though it has “several hypotheses,” Day said today.
Luon, which is made from a combination of nylon and Lycra spandex fibers, is manufactured in Vietnam and Taiwan, according to Lululemon’s website. The company says it has been producing Luon with Eclat Textile Co. since 2004. The affected items are concentrated in certain styles in “tighter fitting silhouettes,” the company said.
Eclat said the pants were made according to requirements laid out in a contract with Lululemon, the Wall Street Journal reported earlier this week.
Profit this year will be a maximum of $1.99 a share on revenue of as much as $1.64 billion, the Vancouver-based company said today in a statement. Analysts surveyed by Bloomberg projected profit of $2.16 a share and revenue of $1.67 billion, on average.
Lululemon rose 1.3 percent to $64.70 at the close in New York. The retailer has lost 15 percent this year, compared with an 8.4 percent gain for the Standard & Poor’s 500 Index.
“Encouragingly, the company is moving to address its quality issues and guided to a normalized selling environment by the fall,” Brian Nagel, an analyst at Oppenheimer & Co. in New York, wrote in a note today. “However, given the lack of visibility near term, we prefer to wait it out,” said Nagel, who has the equivalent of a hold rating on the shares.
Lululemon, with more than 200 locations, has been expanding into men’s and girls active-wear and opening more stores internationally. Day conducted today’s conference call from Australia, where the company has been opening stores.
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