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Investors in, say, JPMorgan may want more transparency. The same is not true at Lululemon Athletica. The maker of enlightened, if pricey, workout gear has said that its latest batch of signature black yoga pants – available on March 1 – is, too "sheer." The company has recalled 17 per cent of women's bottoms in its stores and warned of a near-term product shortage. The snafu will hit sales; the midpoint of its revenue guidance for the quarter was cut by $15-million, to about $340-million. Comparable store growth is expected at 5 per cent to 8 per cent, down from 11 per cent. Bummer.
Lululemon has been a phenomenal growth story built on high-end yoga wear. Over the past five years compound annual sales growth has averaged nearly 50 per cent; profit has grown faster still. When it reports 2012 results on Thursday, analysts expect sales to increase 37 per cent, to $1.37-billion. The lower comparable store sales in the first quarter follow on a 25 per cent increase in the first quarter of 2012. Shares trade at 29 times forward earnings, even after a 3 per cent decline on Tuesday.
It is especially worrisome that Lululemon does not yet know what caused the problem – the company says it has not changed suppliers or materials. But questions have been raised about whether the see-through pants reveal cracks in the supply chain, a perennial issue for fast-growing retailers. Whatever the cause, the risk is that the stumble hurts the brand. Consumers pay a premium price for what they believe to be premium products. The sheer pants follow problems with bleeding colours. Worse, the bare shelves at Lululemon give customers reasons to try other brands that cost less than the $80 or more Lululemon charges. Premium brands and premium stocks are equally exposed to brand-damaging incidents. Lululemon's shares may not have bottomed yet.