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Little damage expected from Lululemon recall

Lululemon watchers say the company is gaining momentum as its iconic black yoga pants return to store shelves.

LUCAS JACKSON/REUTERS

"Bottoms up – this is no lemon."

That's how retail analyst Jennifer Black summed up the fate of Lululemon Athletica Inc. and, more specifically, the retailer's pants setback this spring, which forced it to pull its signature black stretchy pants for almost three months because the company deemed them to be too sheer.

The pants have been returning to store shelves over the past 10 days, but Vancouver-based Lululemon said the missing pants would cost the chain $67-million (U.S.) in lost sales. The recall affected 17 per cent of its women's yoga pants. On Monday, it is expected to provide an update on the financial hit when it releases its first-quarter results and holds a conference call with analysts.

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The pants gaffe inevitably squeezed business, although already Lululemon watchers say the retailer is gaining momentum as the company replenishes its store shelves.

"We believe Lulu's traffic and fundamentals remain strong," Roxanne Meyer, an analyst at UBS Investment Research, said in a note, pointing to growth opportunities in areas such as e-commerce and men's wear. "International is the next leg of growth to ramp in coming years."

Still, the company is rushing to patch up its mistakes while it forges ahead with a major expansion, including plans for stores outside North America, putting further pressure on its operations and senior team.

In April, Sheree Waterson, its chief product officer who joined Lululemon in 2008, left as part of a broader reorganization of its product group.

Even before that, Ms. Black of Jennifer Black & Associates initiated a "sell" recommendation on Lululemon's stock in March, saying that the pants problem and uninspiring spring fashion had turned her into a non-believer.

"In retrospect we made a Lulu of a bad call," she said in May, switching back to her "buy" recommendation. "We feel that Lulu has been able to execute effectively through this challenge and has come away stronger as a result."

Ms. Meyer said she believes customers who weren't able to purchase black pants at Lululemon picked up alternatives "given a wide breadth of attractive substitutes."

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She raised her first-quarter outlook to 32 cents a share from 30 cents, and her same-store sales estimate to 8 per cent from 7 per cent and overall sales to $338-million from $336-million.

Ms. Black predicted that over the longer term, Lululemon can become a $10-billion-a year company, from about $1.4-billion in annual sales today, Ms. Black said.

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About the Author
Retailing Reporter

Marina Strauss covers retailing for The Globe and Mail's Report on Business. She follows a wide range of topics in the sector, from the fallout of foreign retailers invading Canada to how a merchant such as the Swedish Ikea gets its mojo. She has probed the rise and fall (and revival efforts) of Loblaw Cos., Hudson's Bay and others. More

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