Lululemon Slips and Falls on its Own Pants

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Is it too much to ask that when you spend nearly $100 on yoga pants that the pants don’t lose their color? And while we’re at it, shouldn’t those pants also be able to go downward on their own, while shaping, toning, and lifting?

Lululemon Athletica (NASDAQ: LULU) tripped over the cobra position and watched its stock fall like a bad warrior this week, after complaints that its yoga pants lost color and turned transparent. And all this after complaints last year that the colors on the pants bled onto shirts. In response, the company has pulled the pants from stores and is offering customer refunds. The company expects to take a $20 million hit.

In its annual report in March 2012, the company warned that it is was exposed to risks due to its reliance on a limited number of suppliers. The company likes to keep its products in demand by making them more exclusive and by keeping inventory limited. The company sourced the Luon pants from a single manufacturer in Taiwan, and the fibers used to make the fabric were supplied by a single company. As a result, they will not be easily replaced.

"We may experience a significant disruption in the supply of fabrics or raw materials from current sources or, in the event of a disruption, we may be unable to locate alternative materials suppliers of comparable quality at an acceptable price, or at all," the company said in the annual report last year.

The $14.3 billion U.S. market is growing twice as fast as women’s apparel overall, according to NPD Group, a market research firm based in Port Washington, New York. Women don’t want to just work out, they want to look good while doing it. Women’s athletic wear has been a fast-growing and lucrative market. Companies like Target (NYSE: TGT), Nordstrom, and even Victoria’s Secret, have their own private-label brands.

Gap, (NYSE: GPS) once known for its popular khakis and jeans, opened its own athletic wear store and catalog, Athleta. Like Lululemon, Athleta staff is trained to speak sports, and make recommendations for apparel based on the athleticism in question. Gap bought Athleta in 2008 for $150 million.
Target, known for stylish yet affordable clothing, opened C9 Active Apparel, in San Francisco last year. The 3,000-sq.-ft. store is devoted to the C9 by Champion activewear brand. The C9 brand was launched by Target in 2004.

With the growing competition in the athletic wear market, Lululemon needs to watch its back. (Is it too soon to make jokes about how much of its backside can be seen?) The market is growing and becoming more competitive by the day. The insular and limited business model that the company has embraced may be its downfall yet.

Erin McBride has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica. 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!

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