Lululemon's Latest 'Lemon' Not Expected to Hurt Company

NEW YORK (TheStreet) -- Another 'lemon' from Lululemon (LULU), and another recall.

But unlike the company's 2013 debacle over see-through yoga pants, the latest incident isn't expected to take a serious toll on the company's brand or stock price in the long term.

On Thursday, the company announced it was recalling about 318,000 hoodies after a flurry of people reported injuries related to the elastic drawstrings around the neck. 

"The issue is quality control -- they obviously, for whatever reason, have a problem with this!" said Howard Davidowitz, chairman of Davidowitz & Associates, a retail consulting and investment banking services firm. Still, he doesn't expect the latest recall to sink the company's shares as the recall in 2013 did.

"The pants -- that was the heart of their whole business -- it was about 40% of their sales," said Davidowitz. "So, when that went off the track, that caused a riot."

Hoodies are a much smaller part of the company's sales, and replacing the elastic drawstring is a relatively easy fix.

 "I don't think it will damage the brand the way the Luon pants did a couple of years ago," said Susan Anderson, a vice president and senior analyst at FBR Capital Markets & Co. "You can go to the store and exchange the jacket for a new one or one with the correct ties that don't snap back in your face. Whereas with the Luon pants, there was a shortage of them because they had to remake everything."

Back in 2013, the company recalled 17% of its black yoga pants, after complaints that its proprietary Luon fabric was too sheer. The snafu prompted the departure of CEO Christine Day, while founder Dennis "Chip" Wilson made inflammatory comments in the press, where he attempted to place the blame for the problem on certain women's body shapes -- and not the pants themselves: "Some women's bodies don't work [in the pants] ... It's really about the rubbing through the thighs, how much pressure is there over a period of time," he said in his memorable interview.

The backlash was swift, prompting him to make what turned out to be an unconvincing and widely panned apology. By that point, the damage was done.

All of this took a toll on both the company's financial picture -- its revenue came in about $44 million lower than analysts expected in the first quarter, and its stock price slumped as low as $36 a share from its peak of $78 before recovering in 2014. 

Experts don't expect a similar backlash this time.

"The quantities [recalled] are much smaller," said Anne-Charlotte Windal, a senior analyst at Sanford C. Bernstein.

Also, Lululemon responded much faster to the issue than it did in the previous recall.

"It's an indication management learned from its mistakes and is being more responsive to potential perceived quality problems," said Paul Alexander, a senior analyst at BB&T Capital Markets. He's surprised the issue surfaced at all. "If I caught myself in the eye with a draw cord, I would probably blame it on my own clumsiness before I'd blame it on the company."

The U.S. Consumer Product Safety Commission reported seven incidents of injuries to the face and eye that were related to Lululemon's elastic draw cord.

"When the elastic draw cord with a hard tip in the hood or around the neck area is pulled or caught on something and released, it can snap back, impact the face area and result in injury, where the hard tip snapped back on the face," the commission posted on its website.

While the recall shouldn't materially impact sales, Both Davidowitz and Anderson say the company does need to work on its supply chain and quality control problems. "They need to implement new processes and procedures," said Anderson.

However, both remain bullish on the company's prospects. 

"Obviously something is off the rail that needs to be fixed," said Davidowitz. "But is this going to destroy their business? No, it won't. Because they're in the right business at the right time with the right product -- I think they're OK, but it better not happen again."

Meantime, competition in this segment has been escalating from athletic giants, such as Nike (NKE) and Under Armour  (UA), the rollout of Gap's (GPS) GapFit athletic wear division, and the debut of specialty brands, such as Kate Hudson's Fabletics workout line. Many are rushing into the sector to cash in on the niche's growing popularity as more and more women opt to don athletic wear both in and out of the gym.

"I think it's going to get tougher and tougher because everyone is really going after this woman athletic consumer," said Anderson. Nike, for example, disclosed this week that its women's business grew 20% to $6 billion in the fiscal year that ended May 31. Still, Anderson sees plenty of growth opportunity for Lululemon both internationally and on the men's side. 

"When something gets hot, of course everybody is trying to get into the business. But Lululemon is the leader, and they have the reputation and the customers are very loyal and love them," said Davidowitz. 

Experts see any stock selloff from the hoodie recall as a buying opportunity.

"When they went into the tank the last time, I bought. I made about 14 points -- I made $1.9 million in a short period of time," said Davidowitz. He says Lululemon has "enormous" gross margins and their "sales per square foot are the highest in the U.S. apparel chain industry."

"If this little snafu has an impact on the stock, it would certainly be a buying opportunity," concurred Alexander.

Lululemon shares were trading at $67.05 late Friday, down 51 cents or 0.75% for the day. Windal has a 12-month price target on the stock of $76.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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