Lululemon forced to cut outlook after quality questioned

Yoga apparel retailer Lululemon Athletica was forced

to review its outlook after disclosing that production of its popular black “luon” women’s yoga pants “had run into technical difficulties” and were thinner than usual. The company will provide details about the effect the problems will have on their 2013 bottom line on Thursday when it reports its fourth-quarter results.

The pants that made it to store shelves after March 1 were thinner than usual – “a level of sheerness … that falls short of our very high standards,” explained Lululemon Athletica in a communication issued on Monday after the market close.

On top of withdrawing the faulty clothes, which make up nearly the 17 percent of the total women yoga pants available at more than Lululemon's 200 stores. The move is expected to have “a significant impact on our financial results,” the company said.

Accordingly, Lululemon has downgraded its outlook for its first-quarter results, now expecting revenue of between 333 million dollars and 343 million dollars. This compares to the company´s previous forecast of 350-355 million dollars. In the same vein, it dropped its same-store sales guidance at outlets open a year or more – a crucial measure of retail health – to an increase of between 5 and 8 percent, rather than 11 percent.

The episode, the second quality issue disclosed in less than a year, could undermine Lululemon's reputation, reported Reuters, who also quoted analysts who noted that competition from lower-priced brands is heating up. Last July, the company acknowledged problems with dye-bleeding in some of its apparel. "Those are two black eyes for a brand that is supposed to stand for quality in the marketplace," said for Reuters Brian Sozzi, chief equities analyst at NBG Productions. "It's a window of opportunity for Lululemon competitors."

On Monday, Christine Day, chief executive officer of Lululemon, said the retailer’s first priority is to protect the quality of its fabrics so as to keep customers’ loyalty. “We will accept nothing less than the very highest quality we are known for.” “We have used the same manufacturing partner on key fabrics since 2004. This event is not the result of changing manufacturers or quality of ingredients.” Also, Lululemon said it will offer full refunds or exchanges to customers who bought the black “luon” pants after March 1 either online or in stores.

In January, Lululemon forecast sales for the final quarter of its year that trailed analysts’ estimates, posing a possible slowdown. Lululemon has reported sales growth of at least 30 percent for the past 13 quarters, according to data compiled by Bloomberg.

Camilo Lyon, analyst at Canaccord Genuity, reduced estimates and his stock price target on Lululemon, but kept his ‘buy’ recommendation on the stock. “That said, the time needed to remedy the issues is at question. For now, we assume product shortfall through [the second quarter], implying near-term downside to the stock,” Lyon summed up in a note to investors. He now holds an EPS forecast of 2.26 dollars.