Why Sheer Lululemon Yoga Pants Could Kill LULU Stock

by Alyssa Oursler | November 8, 2013 10:42 am

Lululemon (LULU[1]) is facing more complaints that its yoga pants are too sheer, and LULU stock continues to get battered as a result.

lululemon stock LULUQuality problems for Lululemon began in March, as LULU recalled nearly a quarter of its popular black Luon yoga pants[2] for being too sheer. That mishap alone is expected to total a $67 million loss in revenue for the year.

Now, though, customers still aren’t happy with the quality of LULU yoga pants[3], and investors aren’t too happy with LULU stock.

Quality concerns are especially bad for a company like Lululemon, which charges a premium for its apparel. It’s hard to justify a $100 price tag when the high-quality argument goes out the window. It’s even harder to justify that cost when companies from Gap (GPS[4]) to Target (TGT[5]) offer cheaper alternatives[6]. And you don’t win any brownie points by blaming the bodies of your female customers[7].

Meanwhile, any sign that growth is slowing down is especially bad for a momentum play like LULU stock.

Lululemon earnings for the third quarter are expected to come in at only 41 cents per share — a mere 5% improvement over last year. And for the full year, growth of just 6% is on tap.

Not exactly encouraging when shares of LULU stock are trading for around 34 times estimated full-year earnings.

Sure, Lululemon stock could once do no wrong. LULU stock was a darling among momentum traders, cruising from less than $3 a share in early 2009 to just under $80 a share in early 2012.

But LULU stock has been struggling this year thanks to the sheer-pants mishap and the unimpressive numbers that have come with it. On top of that, Lululemon stock was pounded by the resignation of CEO Christine Day[8]. Day’s sudden departure sent LULU stock off a cliff in June.

Shares have regained some ground since then, but are headed in the wrong direction once again. In fact, Lululemon stock has lost 7% in the past month alone.

Even without quality problems, Lululemon was already struggling to justify its premium and to continue finding growth beyond its core demographic. Some suggested LULU needed to expand into men’s apparel. But as I wrote in August[9], over-expanding runs the risk of diluting the Lululemon brand.

Then again, by continuing to put out subpar products, Lululemon is diluting its brand anyway — and not even getting the benefits of expansion.

That should be a huge, red flag for LULU stock investors.

As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities.

  1. LULU: http://studio-5.financialcontent.com/investplace/quote?Symbol=LULU
  2. LULU recalled nearly a quarter of its popular black Luon yoga pants: https://investorplace.com/2013/03/lululemon-recalls-unintentionally-see-through-pants/
  3. still aren’t happy with the quality of LULU yoga pants: http://www.usatoday.com/story/money/business/2013/11/01/new-quality-complaints-about-lululemon-pants/3360947/
  4. GPS: http://studio-5.financialcontent.com/investplace/quote?Symbol=GPS
  5. TGT: http://studio-5.financialcontent.com/investplace/quote?Symbol=TGT
  6. cheaper alternatives: https://investorplace.com/2013/10/lululemon-yoga-pants-lulu-gps/#.UnzwDXCsiSo
  7. blaming the bodies of your female customers: http://www.chicagotribune.com/business/breaking/chi-lululemon-yoga-pants-20131107,0,1958186.story
  8. resignation of CEO Christine Day: https://investorplace.com/2013/06/lululemon-ceo-day-will-step-aside-lulu/
  9. But as I wrote in August: https://investorplace.com/2013/08/the-real-problem-lululemon-is-facing/#.Unzwm3CsiSo

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