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Morning Business Briefing

Some Lululemon pants still see-through, analyst says, cuts stock outlook Add to ...

These are stories Report on Business is following Wednesday, July 10, 2013.

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Analyst still sees Lululemon issues
Lululemon Athletica Inc. may have restocked its stores after pulling Luon pants because they were too sheer, but a U.S. analyst warns that the issue is still dogging the yoga wear retailer.

“Women continue to note that underwear are visible through the pants when they bend over,” said Liz Dunn of Macquarie Capital in New York.

“The company notes on its website that customers should do a downward facing dog in a mirror to test the product,” she added in a new research note.

“They also recommend checking to make sure your size is appropriate and sizing up in some cases. We visited a store and were specifically told that the running product was not meant for bending. This was echoed in the comments of many product reviews.”

There are other issues, but that’s the main one, according to the research from Ms. Dunn, who lowered her 12-month price target on Lululemon shares to $62 (U.S.) from $74.

Lululemon said testing for quality “has never been better than it is now,” and most of the feedback it has received related to the recall has been positive.

“However we know the Luon issues have heightened the focus about sheerness for some guests,” it said.

Producing Luon products is Lululemon’s top priority, the company said, adding it will continue to innovate.

“We’re seeing a few negative comments online which may be because guests don’t have the benefit of doing an in-store fit session with one of our educators to make sure the fit is right for them.”

The company has taken steps to address the issue that led to the recall, including new testing procedures and putting its own employees in the factories that make the pants.

Ms. Dunn said she scoured 597 customer reviews since the issue was said to be resolved, and that “while we are still fans of the brand and think there is very little in the marketplace that is comparable from a styling perspective, we are concerned by what we see as ongoing quality issues.”

Customers may have become more aware of the issue because of the publicity surrounding the recall, she added.

The sheerness issue remains the top concern, she said, “particularly for Wunder Unders but really it was mentioned among the complaints for almost all product containing Luon.”

Ms. Dunn fears ongoing issues could “erode” the strong Lululemon brand, and believes the company must move quickly to resolve them lest loyal fans go elsewhere.

“One of the company's mottos is 'Sweat Everyday' and we believe consumers expect to be able to both bend and sweat in LULU's premium-priced athletic product,” she added, referring to the company by its U.S. stock symbol.

Another analyst, Camilo Lyon of CanaccordGenuity, believes good times are ahead for Lululemon.

"After what has been a series of negative news events for LULU over the past few months, punctuated by the Luon recall and CEO Christine Day's announced resignation, we see a number of positive catalysts that we believe should turn the momentum in the stock," he said in a research report on Monday.

"These include continued replenishment of Luon yoga pants that is yet to reach 100 per cent pre-recall levels, explicit advertisements to customers indicating its ‘back in black’ status, and the announcement of key management hires," Mr. Lyon added.

"We continue to fundamentally believe the demand for the brand has not ebbed and the growth opportunity both domestically and internationally is robust.”

Judge rules against Apple on e-books
Apple Inc., the lone holdout in a price-fixing case that rocked the U.S. publishing industry, has been found guilty of breaking antitrust law by entering into a conspiracy to raise the price of e-books, The Globe and Mail's Omar El Akkad reports.

A New York district judge ruled against Apple today in a case initially brought forward by the U.S. Department of Justice last year. Prosecutors alleged Apple teamed up with five U.S. publishers – Macmillan, Hachette Book Group Inc., HarperCollins Publishers LLC, Penguin Group (USA) Inc. and Simon & Schuster Inc. – to effectively eliminate price competition in the e-books industry.

Unlike all the publishers named in the initial complaints, Apple refuses to admit it did anything wrong.

“Apple did not conspire to fix e-book pricing and we will continue to fight against these false accusations,” a company spokeswoman said.

“When we introduced the iBooks store in 2010, we gave customers more choice, injecting much needed innovation and competition into the market, breaking amazon’s monopolistic grip on the publishing industry. We’ve done nothing wrong and will appeal the judge’s decision.”

Markets uncertain
Two of the issues that have plagued investors for some time now – central bank stimulus and China’s economy – means another uncertain day on global markets.

That doesn’t necessarily mean a bad day, or a good one at this point, just one of uncertainty as investors digest the latest trade data from Beijing and await the minutes of the last meeting of the Federal Reserve and a speech by Fed chairman Ben Bernanke.

What investors are looking for most are signals on the Fed’s timeline for easing its stimulus measures.

Add to that the continuing issues in the troubled euro zone, and yesterday’s downgrade of the global economic outlook by the International Monetary Fund, and what you’re left with is “a distinct element of caution to be felt in early trade as investors await further information about U.S. monetary policy,” said market analyst Alastair McCaig of IG in London.

He was referring to the release this afternoon of the minutes from the last session of the U.S. central bank’s policy-setting group, the Federal Open Market Committee. That will be followed by Mr. Bernanke’s speech, though it’s uncertain how much he’ll touch on that issue. The speech is on Fed history.

The FOMC is poised to begin easing its extraordinary asset-buying stimulus program, known as quantitative easing, or QE, as early as the fall, and possibly ending it altogether sometime next year.

Investors have been hanging on every word and indicator, seeking assurance that the U.S. economy and the markets can withstand what’s now simply referred to as “tapering.”

“It is unlikely that Mr. Bernanke will acquiesce to market speculation on timing, given that any such actions would have to be agreed at FOMC level first, but the bullishness or otherwise of the tone of his speech could well prompt the market to read between the lines on when we could expect to see such a program begin,” said senior analyst Michael Hewson of CMC Markets in London.

Weighing on the markets, too, are today’s trade numbers from China, which showed a surprising drop in exports and imports in June.

China is seen as the engine of the world’s recovery and any suggestion that it’s running low on power is troubling.

Still, the Fed is the more important story today, as it has been for some time, particularly given that the latest reading of the U.S. jobs market last Friday was better than anticipated, a signal for a central bank whose actions are being guided by the high level of unemployment.

For now, global markets are mixed.

Tokyo’s Nikkei lost 0.4 per cent, while Hong Kong’s Hang Seng rose 1.1 per cent. Major European and North American exchanges were also down.

China’s trade data disappointing
China’s trade numbers weren’t just disappointing. They also suggest more trouble ahead.

Indeed, a customs official told reporters today, according to Reuters: “China faces relatively stern challenges in trade currently. Exports in the third quarter look grim.”

Exports are one thing, given what they mean to the domestic economy. Imports are another entirely, given what they mean to other economies, particularly those heavy into commodities, are counting on China.

Chinese exports fell 3.1 per cent in June from a year earlier, according to official measures, while imports slipped 0.7 per cent.

“China’s exporters in June had their worst single month since the depths of the financial crisis,” said Mark Williams and Qinwei Wang of Capital Economics in London.

“Imports for domestic use fell too,” they added in a research note.

“Commodity imports performed relatively well, though there is no sign that the year-long stagnation in real import demand has ended.”

EU proposes bank plan
Another pitched battle is brewing in Europe, this one over a new proposal for dealing with troubled banks.

And, as is usual in the European Union, Germany is poised to fight it.

The European Commission today unveiled a proposal for a “single resolution mechanism” for the region’s banking union, one that would put power in the hands of a panel of officials from the EC, the European Central Bank and the “relevant” nations involved.

This centralized body would decide how to restructure or wind up failing banks. The country whose bank is at the heart of the matter, however, would lead the execution, though “under the supervision” of the oversight panel.

"We have seen how bank crises can quickly spread across borders, sending confidence into a downward spiral throughout the euro area,” said Michel Barnier, the region’s internal market and services commissioner.

“We need a system which can deliver decisions quickly and efficiently, avoiding doubts on the impact on public finances, and with rules that create certainty in the market,” he added in a statement.

The EC said its role “would be limited to the decision to trigger the resolution of a bank.” There’s more there than meets the eye: The key is that the EC would have that deciding power in the first place.

Germany, the deep pockets in the ongoing euro zone crisis, has already warned of encroachment on sovereignty.

“I would strongly ask the commission in its proposal for an SRM to be very careful, and to stick to the limited interpretation of the given treaty,” German Finance Minister Wolfgang Schaeuble said yesterday, according to Bloomberg News.

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