After See-Through Pants Debacle, Here's Why Lululemon Will Be Just Fine

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Share's of lululemon athletica¬† (NASDAQ: LULU  ) got hammered on Tuesday, falling as much as 8% during intraday trading (though it recouped much of those losses by the market close) after the company issued a massive recall involving some of its attire.

But transparency is a good thing, right?
Not when it involves your black yoga bottoms. Indeed, after realizing the pants in question were a smidge on the sheer side, Lululemon quickly jumped on the issue, calling for the return of around 17% of the bottoms sold in its stores.

As a result, and as fellow Fool Blake Bos pointed out Tuesday, Lululemon has warned that total revenue for the quarter may fall as much as 3%, while same-store sales could see a massive decrease from current levels of around 11% to between 5% and 8%.

All told, this is the company's fourth quality control issue over the past year, with the other incidents involving problems with bright colors bleeding, as well as previous transparency issues related certain light colored pants and -- even more embarrassing -- select colors of swimwear shipped last spring. 

Lemons to (lulu)lemonade
This time, however, I think Lululemon deserves a round of applause for getting out in front of the issue as quickly as possible.

The company is growing like a weed, as its third-quarter revenue rose 37.5% year over year to $316.5 million, driven not just by strong organic growth but also by the addition of 36 new corporate-owned stores over the past year, bringing its total number of locations to 201.

What's more, while Lululemon may have a little ways to fall after this week's disappointing news, it should still remain absurdly profitable with no debt on its books. After all, thanks to the willingness of its loyal customer base to repeatedly purchase its high-priced products, the company currently operates with an impressive net margin of 18.7%, and consistently demonstrates a knack for creating shareholder value with high returns on invested capital of 35.53%.

But you might be wondering: Won't this recall turn off some of those loyal fans? Probably.

It's hard to argue any recall could be good for business -- especially recalls of this magnitude -- and you can bet competitors like Gap (NYSE: GPS  ) with its Athleta brand are just champing at the bit to seize the dollars of any defectors. Gap, for one, knows firsthand how lucrative the yoga business can be, and is counting on Athleta as one of its primary growth drivers going forward. After opening 25 new Athleta stores last year, the clothing giant plans to open an additional 30 units in 2013.

Put on your stretchy pants and relax
Rabid fans of the Lululemon brand, however, may be harder to disappoint than you think, especially now that they know the company is willing to do what it takes to back up the ever-important quality of its products, even if that means sacrificing a significant amount of profit over the short term.

That, my fellow Fools, is exactly the long-term mind-set that makes companies like lululemon great, and why I'll be opening an "outperform" CAPScall on the stock soon.

More expert advice from The Motley Fool
Lululemon has the potential to grow its sales by 10 times if it can penetrate its other markets like it has in Canada, but without question, the competitive landscape is starting to increase. Can Lululemon fight off larger retailers like Gap and Nordstrom, and ultimately deliver huge profits for savvy investors like yourself? The Motley Fool answers these questions and more in our most in-depth lululemon research available for smart investors like you. Thousands have already claimed their own premium ticker coverage, and you can gain instant access to your own by clicking here now.

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Related Tickers

9/28/2016 4:00 PM
LULU $63.51 Down -1.01 +0.00%
Lululemon Athletic… CAPS Rating: ***
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Gap CAPS Rating: **