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Lululemon (NASDAQ: LULU ) made a name for itself in the athletic-apparel industry by offering top-of-the-line yoga wear made with technical fabrics, such as luon and silverescent. "Quality is at the heart of everything we do, from the technical features we (sometimes literally) weave into our products, to the people we work with and relationships we build," or so Lululemon boasts on the company website.
Unfortunately, Lulu's reputation for quality has been stretched a bit thin lately. As you probably know, the company was forced to pull more than 17% of its signature luon pants from store shelves following an issue with sheerness. In fact, the see-through pants recall could end up costing Lulu as much as $67 million in lost revenue this year.
When the problem first surfaced last month, Lululemon was quick to blame its longtime Taiwanese supplier Eclat Textile. Now, after a back and forth game of "we said, they said," it seems Lululemon is finally ready to take some responsibility for the recent quality control issues.
Earlier this week, Lulu admitted that its testing protocols were incomplete for some of the fabric in question. Additionally, the company announced that its chief product officer, Sheree Waterson, would be leaving the company come mid-April. Waterson's departure isn't entirely unexpected. Particularly, if you consider this is the company's fourth major quality control problem in less than a year.
Lululemon is now in the process of diversifying its supplier base, in order to help avoid production problems such as this in the future. Specifically, Lululemon said it would have two new manufacturing sources ready by the fall. The company is also implementing new testing and quality processes, stationing employees in factories to conduct manufacturing oversight, and establishing a new product leadership team.
Welcome back, Lulu -- your fans missed you. It's a relief to see Lululemon getting back to its corporate transparency, and away from product transparency. However, the company's recent moves to rectify the situation haven't stopped competitors from taking advantage of Lulu's missteps.
Competitors including Nike (NYSE: NKE ) and Under Armour (NYSE: UA ) jumped at the opportunity to capitalize on Lululemon's shortcomings. In fact, Under Armour's recent ad campaigns are both amusing and timely. For example, an ad for Under Armour's line of yoga pants included the slogan: We've Got You Covered."
Nike is also making a play for Lululemon's niche market of athletic yoga apparel. The sporting goods giant is aggressively pushing into the space with new product lines, such as the Nike Legend pants. Nike promotes its women's yoga pants as having comfortable coverage to keep wearer's covered when bending and stretching.
There's no getting around it: Competition is a given in this industry. And if Lululemon wants to remain on top, it needs to get back to what it does best, which is product diversification. Before the recent setbacks, Lulu's products stood out from the competition because of their superior quality and design. If the company can put these production issues behind it once and for all, investors should see a nice rebound in the stock.
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.