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Originally published March 21, 2013 at 6:50 PM | Page modified March 21, 2013 at 6:50 PM

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Yoga-pants shortage to hurt Lululemon profit

Lululemon’s too-sheer pants will hurt profits.

Los Angeles Times

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Lululemon Athletica’s recall of its too-sheer black yoga pants will cause trouble far into next year, the company said Thursday as it reported fourth-quarter and full-year fiscal earnings.

Late Monday, the Vancouver, B.C., company said it had pulled black yoga pants made with Luon fabric — a mix of nylon and Lycra spandex fibers — from stores and the Web after deeming them to be too skimpy.

The chain said it was still investigating the problem. Lululemon said it hasn’t switched manufacturers or ingredient quality since 2004.

Already, the issue is inflaming customers claiming to have been mistreated by company associates while trying to return pants without enough rear-end coverage.

Lululemon Addict, a blog for fans of the brand, this week posted readers’ tales of Lululemon sales associates asking that customers put on the pants and then bend over to determine whether the clothing was see-through enough to warrant a refund.

On Lululemon’s Facebook profile, where customers were complaining of a “disconnect between corporate and the stores,” Lululemon wrote that it is “working with the guests who have reached out ... and following up with their store accordingly.”

On a Thursday conference call, Wall Street analysts peppered 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. “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,” said Mark Sunderland, a professor of textile engineering at Philadelphia University. “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.

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 Thursday.

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 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 Thursday 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 Thursday. “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 activewear and opening more stores internationally. Day conducted today’s conference call from Australia, where the company has been opening stores.

On Thursday, the company expanded on its forecast that the recall would crimp its financials this year. Earnings per share this quarter will be 11 to 12 cents lower, to between 28 and 30 cents a share, because of the recall, the company said. Over the year, the pants crisis is projected to cost the company $57 million to $67 million in lost revenue.

Lululemon reiterated that it expects net revenue for the quarter to fall to between $333 million and $343 million, with the recall shrinking an earlier prediction of $350 million to $355 million. Same-store sales — an indicator of stability that only measures stores open at least a year — will rise between 5 percent and 8 percent, not 11 percent as earlier anticipated.

Before the recall, Lululemon’s financials seemed to be going strong. For the fourth quarter, which ended Feb. 3, the company’s earnings soared almost 50 percent to $109.4 million, or 75 cents a share.

The results beat analyst expectations. During the same period a year earlier, Lululemon pulled in $73.5 million in profit, or 51 cents a share.

Revenue for the quarter stretched up 31 percent to $485.5 million, while same store sales got a 10 percent bump.

Material from Bloomberg News

is used in this report.

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