Black luon recall continues to affect Lululemon earnings

Lululemon Athletica is still feeling the effects of the recall of its black luon yoga pants earlier this year.

In mid-March, 2013 Lululemon learned that a group of shipments of women’s black luon bottoms, one of Lululemon’s most popular products, turned out to be nearly see-through. Once aware of the issue, Lululemon began pulling all the problematic pieces from its stores, showrooms and e-commerce sites, and working quickly with its other manufacturers and factories to replace the pulled pants, the company reported in its form 10-Q for the second quarter of 2013.

For a brand that prides itself on its high-quality product a mishap like this can be very damaging, and have prolonged effects on the company’s reputation, as well as on its finances. Lululemon’s first two quarterly reports for 2013 have revealed just how great of an impact. In the second fiscal quarter of 2013, ended August 4, Lululemon reported $56.5 million in net income, a 2 percent decrease from the reported $57.2 million in the second quarter of fiscal 2012, compared to a 1.4 percent increase in the first fiscal quarter of 2013 from $46,643 in 2012 to $47,279 in 2013.

Lululemon is continuing to see growth, however, in revenue—John E. Currie, chief financial officer at Lululemon, stated, “For Q2, total net revenue rose 21.9 percent,” in the company’s conference call webcast on Sept. 12, 2013. Also, there is continued expansion with new stores opening around the U.S. and Canada, along with the announcement by Christine Day, Lululemon’s chief executive officer, on the 2014 opening of the company’s first corporate owned store in Europe in Covent Garden, London. Nonetheless, the company is still feeling the negative fiscal effects of the recall on the black luon items.

The continued decrease in net income for 2013 is a result of additional expenses and the write down of the affected black luon product. Lululemon recorded a $17.5 million inventory provision for the affected luon during the first quarter of fiscal 2013.

Besides incurring additional costs, Lululemon also saw its profits pinched because the recalled pants, at around $80 a pair, were among its most profitable offerings. “Product margin declined 220 basis points due primarily to a lower mix of higher margined black luon bottoms, and increases in our inventory reserves,” said Currie.

These black yoga bottoms are an essential aspect of the Lulu brand, which many women have come to believe in and rely on.

Alex Bjornnes, a senior at Southern Methodist University and long-time Lululemon customer, believes the quality of Lululemon, overall, has been falling. “I think a lot has declined! I have been wearing Lulu for the past six or seven years, and some of my oldest pieces look the best over my newest pieces.”

The question of quality is not only linked to the see-through bottoms episode, but also to a few other issues. “They have had issues with poorly sewn seams and a lot of fabric-dye bleeding—mainly on neon colors,” Bjornnes continued.

The color-bleeding issue did not result in a recall, but Day addressed the issue during the second quarter conference call for September 2012, saying, “It was the bright neons which are very difficult to put on fabric, and we pushed the color limit pretty intently. So, we did have bleeding…”

Lululemon advised customers to wash the items carefully.

However, despite the question of whether Lululemon is losing its product quality, its reputation for top-of-the-line technical workout wear brings customers coming back for more, or as Bjornnes said, “I will always drink the lulu lemonade.”

The total cost of the recall of its black luon items is not clear, however, when looking at sales from 2012, which increased 52.9 percent in the first quarter and 43.3 percent as compared to the first and second quarters of 2011, the 21 percent increase for the first quarter of 2013 and the 21.9 percent increase for the second quarter of 2013 seem dismal.

Lululemon is working to erase the effects of the recall, as demonstrated by the expansion over the past year and by the September 12, 2013 announcement of its deal reached with Noble Biomaterials to be the exclusive user of its X-STATIC antimicrobial technology.

Lululemon believes it will soon shrug off the effects of the luon fiasco , and expects its net revenue to be around $370 to $375 million.

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