The see-through yoga garb is the latest in a series of quality glitches that threatens to alienate the retailer's hardcore fan base, which has so far been more than willing to shell out $100 for pants and other athletic garments. These legions of followers have helped Lululemon, founded in 1998, become a billion-dollar business.
Eva Glettner, 33, of Los Angeles is a case in point. Glettner, who has been a devoted fan of Lululemon, said she'll now shop only at Target to buy her yoga outfits.
"You expect a certain quality, and they definitely let me down," Glettner said. "For that price point, it's unacceptable."
Glettner says Target has similar pants for $30. "It's hard enough making a commitment to working out without worrying about whether you are baring your behind."
Lululemon Athletica Inc. said on its website that it first began to understand the extent of the problem on March 11 as part of its weekly call with store managers, who voiced worries about sheerness. Lululemon declined to respond to Associated Press queries about whether the problem was discovered when customers started to return the Luon pants, the latest batch of which went on sale at the beginning of the month.
But Faye Landes, an analyst at Cowen & Co., believes customers reported the problem to store managers, who in turn reported back to management.
"If this is indeed the case, we suspect a serious lapse in (the company's) supply chain, quality control and vendor management and specifically in its quality assurance program," she said.
Investors usually like transparency. But not in this case. Lululemon's stock price slid $3.90, or 6 percent, to $62, before recovering and closing Tuesday at $64.08, lobbing more than $250 million off of its market value in one day. The stock is down 16 percent so far this year, while the broader markets have been hitting multiyear highs.
Lululemon insists that the problem didn't occur because it changed specifications for the clothing or switched suppliers. It warned that the recall could lead to short supplies and will hurt its first-quarter revenue. The Luon pants, made from a combination of nylon and Lycra fibers, are one of the retailer's product staples and account for about 17 percent of all women's pants in its stores. The company is offering customers' full refunds or exchanges.
The debacle marks the fourth quality problem in the last year for Lululemon, according to Credit Suisse analyst Christian Buss - and not the first see-through issue.
First, the Vancouver-based company had sheerness problems with certain swimsuits for spring 2012. And some light-colored pants currently on sale carry this disclaimer: "You may experience sheerness with some of our bright-colored bottoms because of the lightweight nature of the fabric. We recommend you do a couple of Down Dogs in your brightly colored bottoms to ensure you're happy with the fit and coverage." ''Down Dogs" refers to a yoga position. The company also has had problems with bright dyes bleeding.
Until now, Lululemon has been as much a star for investors as it has for yoga devotees. Its shares rocketed from less than $3 in 2009, to more than $81 last May. Analysts expect to get more details when Lululemon posts earnings for the final quarter and full fiscal year on Thursday. But already some Wall Street analysts have downgraded the stock.
"We see some potential that (Lululemon) risks alienating its core customer bases should quality control issues persist," Buss wrote in her note. Based on her own research, Buss said the Luon fabric is sourced from a Taiwanese manufacturer.
Lululemon confirmed through an outside publicist that its sourcing manager for raw materials is at the facilities of the supplier, Taiwan-based Eclat Textile Co.
Still, some marketing experts dismissed the debacle as a temporary glitch and said Lululemon's loyal customers won't switch to rivals like Nike Inc. or Champion anytime soon.
"It's a late-night TV joke, and it's going to pass," said Robert Passikoff, president of Brand Keys Inc., a New York customer research firm. "The issue is closure, contrition and care. Clearly, they're doing everything they need to do."
Lululemon cut its first-quarter revenue forecast as a result of its decision to withdraw the pants. The company now anticipates first-quarter revenue between $333 million and $343 million, down from an earlier estimate of $350 million to $355 million. Analysts polled by FactSet had previously forecast revenue of $352.1 million.
The company also slashed its outlook for first-quarter revenue growth at stores open at least a year to between 5 percent and 8 percent, from 11 percent previously.
FAQ FROM LULULEMON
What is the issue?
Some of our bottoms were made with a batch of black luon that doesn't meet our standards so we've pulled them from our floors and our website.
We have determined that certain shipments of product received from our factories and available in store on March 1, 2013, do not meet our technical specifications.
On the weekend of March 16, 2013, we pulled all of the affected black luon women's bottoms from our stores, showrooms and e-commerce site and are working with our supplier to replace the fabric and our other manufacturers to replace these key items as quickly as possible.
What items are affected?
It's certain styles concentrated in our tighter fitting silhouettes in women's black luon bottoms.
How are the items affected?
The ingredients, weight and longevity qualities of the women's black luon bottoms remain the same but the coverage does not, resulting in a level of sheerness in some of our women's black luon bottoms that fall short of our very high standards.
What percentage of product does this represent?
This represents approximately 17% of all women's bottoms in our stores.
What materials are used to make luon?
luon is made from a combination of nylon and Lycra spandex fibres.
When did you know?
We first began to understand the extent of the issue on Monday, March 11th as part of our weekly call with store managers.
Some of our store managers expressed concern over the sheerness of some of our women's black luon bottoms.
What did you do first?
Over the past weekend we pulled all of the affected black luon women's bottoms from our stores, showrooms and e-commerce site and are working with our supplier to replace the fabric and our other manufacturers to replace these key items as quickly as possible.
The quality of our products are paramount so we gathered our internal experts and leaders immediately to get an understanding of the issue
Have you determined the cause of the problem?
We are working closely with our manufacturing partner to understand what happened during the period this specific fabric was made.
Where is it manufactured?
luon is manufactured in Vietnam and Taiwan.
How do guests return product they have purchased?
Guests who purchased black luon women's bottoms since March 1st, either online or in stores, and think they have affected product are welcome to return them for a full refund or exchange.
Please contact our Guest Education Center at 1-877-263-9300 or gec@lululemon.com with questions as to how to return items purchased made through our e-commerce site.
What is the company doing to help resolve the issue?
Our guest is our number one priority and we will take all necessary steps to ensure that we are only making available product that meets our highest standard.
Since we have been made aware of the issue, we have moved swiftly across all channels to ensure that the affected product does not end up in the hands of our guests.
We are also exploring all opportunities to increase inventory levels as quickly as possible, so long as our standards are met.
What impact will this have on your ability to meet guest needs?
For the near term, there will be a shortage of some styles available to our guests.
We are also exploring all opportunities to increase inventory levels as quickly as possible, so long as our standards are met.
What impact will this have on current orders?
We will only ship our guests products that we are confident meet our standards.
In the event that a guest receives black bottoms and has concerns, they can the contact our Guest Education Center at 1-877-263-9300 or gec@lululemon.com with questions as to how to return items purchased made through our e-commerce site.
When will you have "good" product back in your stores?
We are doing everything we can to increase our inventory levels of black luon women's bottoms in our stores as soon as possible.
We will be sharing more information as it becomes available. Stay tuned to store facebook pages, product notifications and lululemon.com for new product drops and updates.
How could this have happened?
This event is not the result of changing manufacturers or quality of ingredients. We are working closely with them to understand what happened during the period this fabric was made.
What are you doing to insure that this doesn't happen again?
We are committed to providing the highest quality products to our guests.
We are in the process of identifying the production issue, and will resume production and shipment of the product when the issue has been addressed and corrected.
Will you be able to recycle the unusable pants or do you have to destroy them?
We have a process to take care of product that doesn't meet our quality standards and will be working to ensure that these products are recycled and managed accordingly as well. Once we have received all the affected luon, we will be able to make an informed decision on the best way to reduce the impact of this batch.
For further information on our sustainability commitments visit http://www.lululemon.com/community/legacies/environment#waste
Does this affect the product made by Ivivva?
We are not experiencing this issue in our Ivivva product.
The Associated Press contributed to this report.
