'See-Through' Pants Will Wallop Lululemon’s Bottom Line
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Many of those who participate in yoga are said to be open minded, free spirited and have a liberal attitude. After all, yoga is all about opening up a heart and experiencing a connection with the whole of universe. But even in yoga, some things are sacred. Nontransparent pants are one of those things.
So when yoga apparel retailer Lululemon Athletica (NASDAQ: LULU) received a March 1 shipment of pants that use its signature fabric Luon, and found a hitch that caused the pants to be sheer, the company pulled down the pants from shelves and off of mannequins, and offered refunds to unknowing customers.
“The ingredients, weight and longevity qualities of the pants remain the same but the coverage does not, resulting in a level of sheerness in some of our women’s black Luon bottoms that falls short of over very high standards,” Lululemon said in a statement.
The snafu, affecting some 17% of the company’s pants it had in stock, could hit Lululemon's bottom -- er -- bottom line, hard. The glitch will reduce projected Q1 sales to $333 million to $343 million, down from the previously expected $350 million to $355 million.
Investors didn’t take this sitting down. Shares slumped more than 6% following the announcement after hours March 18, on top on the 4% lost intraday. Shares were stripped another 2% the following day.
The pants problem comes at a trying time for the upscale retailer. Over the last several weeks, Lulelemon shares have lunged from a 52-week high of $81.09 to around $62.
Over the last three years, despite a loyal following of affluent customers with plenty of disposable income who continued to spend at stores amid the economic downturn, Lululemon has not shown much much in the way of capital return. Revenue and growth rates have waned. Estimates for the next two fiscal years also look weak.
The latest setback underscores the company’s warning in its March 2012 annual report. The company cautioned it is exposed to risks from its heavy reliance on a limited number of suppliers.
While Lululemon has branched out to carry other items like running gear, menswear and accessories, its offerings pale to those of rivals.
That makes rival Nike (NYSE: NKE) a safer sector bet. The Oregon-based behemoth sells a bevy of items for a variety of sports, as well as casual wear. Its iconic “swoosh” brand still carries clout. Nike’s highly recognizable logo is coveted among men, women and teens.
Nike recently reported orders through April 2013 (future orders) were up 14% in North America, Nike’s most mature market. Worldwide demand also remains robust. Every season brings customers to Nike. March Madness, spring track, baseball, swimming, etc. etc.
Under Armor (NYSE: UA), another relative newcomer in the sports apparel market, has enjoyed an annual growth rate of 34% since 2005. But that kind of explosive growth raises a red flag for some. Those growing pains can cause an over-inflated stock price. Trading at a P/E of more than 40, UA shares don’t look cheap. The stock is trading close to a 52-week low, so shares are worth watching. Just right now, prudent investors might be better off watching from the sidelines.
As for Lululemon, even a devout yogi who looks for the good in all things can see the see-through pants and downward predictions spell trouble that no form of meditation can alleviate.
Diane Alter has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica, Nike, and Under Armour. The Motley Fool owns shares of Nike and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!