Lululemon Athletica Inc. is backing away from its initial statement that its costly pants gaffe was the mistake solely of its suppliers.
On Thursday, Christine Day, chief executive officer of Lululemon, said her company may have been at fault because of a possible design shift or some other reason. Lululemon had to recall 17 per cent of its women’s pants because the fabric was too sheer. On Monday,it said the shipments “do not meet our technical specifications.”
“If the mistake was ours through something like a pattern change, or whatever, then obviously we’re on the hook for that,” Ms. Day told analysts on Thursday. “At this point in time, we don’t know specifically what the issue is.”
The error could chop as much as $67-million (U.S.) from the company’s revenue this year.
Ms. Day also said “multiple vendors” – that is, suppliers – were involved. “It’s more complicated than it being just one individual or group.”
On Monday, Lululemon said it had used the same manufacturing partner on key fabrics since 2004, and they were working together to understand what happened.
Vancouver-based Lululemon is struggling with the snafu tied to its signature product – women’s black pants – just as it embarks on a major international expansion, raising questions about whether it will be able to handle even greater complexities.
The latest troubles, which could slice up to 27 cents a share off its 2013 earnings and follow problems last year with dyes that ran, will test the loyalty of Lululemon’s customers to its upscale yoga-wear products as rivals rush to produce copycat clothing, often at lower prices.
Ms. Day said on Thursday the company is moving to diversify its supply sources by the fall, when it should have two additional sources ready to manufacture its key fabrics. And it has hired more quality-control executives in a bid to prevent future mishaps.
“Our company is rooted in integrity and we’re ready to make the tough decisions and do the right things,” she said. “I’m confident that we’ll recover from this setback and be stronger than ever.”
The shipments of faulty pants arrived in stores on March 1 and were removed from shelves last weekend, about two weeks later. Ms. Day said the retailer caught the problem “relatively quickly” and acted promptly and so far hasn’t seen a “significant” uptick in returns.
Retail specialist George Minakakis said Lululemon “needs to accept responsibility and make amends with upset customers who don’t want, or need, to hear about the manufacturer.
“My biggest disappointment with this premium brand is that product went out to stores undetected and, yes, the testing should have included someone wearing the product looking for flaws in the material appearance and performance,” said Mr. Minakakis, a former executive with international eye-wear purveyor Luxottica Group and author of Last Retailer Standing.
Ms. Day said Lululemon failed to have enough quality controls in place to oversee products in the factories and before they hit store shelves. But she said there is no way for inspections to determine that pants are see-through.
“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,” she said after the company released better than expected fourth-quarter results but an anticipated 25- to 27-cent-a-share dent to its 2013 profit as a result of the pants snafu.
“So just putting the pants on themselves doesn’t solve the problem because it passed all of the basic metrics 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 it in the store and started putting it on people that we could actually see the issue.”
The problem will result in Lululemon’s first-quarter profit being squeezed by 11 to 12 cents a share, the company predicts. It expects that the pants problem, which it revealed on Monday, will result in lost revenue of between $12-million and $17-million in the first quarter. As a result, the company expects its first-quarter diluted earnings per share to be between 28 cents and 30 cents, pinched by a writedown tied to the pants problem.
For fiscal 2013, Lululemon expects that lost revenue of $57-million to $67-million from the pants issue will hurt earnings by 25 to 27 cents a share, leading to a profit per share of $1.95 to $1.99. Revenue will be between $1.615-billion to $1.64-billion, it predicted.