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Lululemon Challenged by Lawsuits

Andrew Marder
July 8, 2013

Sometimes, you get in one of those ruts where even the little things don't seem to go quite right. You get a flat tire, the store is out of marmalade, and you trip going up the escalator. It wouldn't be so bad if a few things were going right, but they just aren't. lululemon athletica (NASDAQ: LULU) feels your pain. The company just keeps finding itself on the receiving end of mediocre news.

First the company lost out on sales when it was forced to recall its overly sheer pants, then it lost its chief product officer, and then its CEO announced her departure. Now, Lululemon is under fire from investors, who have filed several class action lawsuits against the yoga retailer regarding its product issues. Will it ever fully recover?

The problem with pants
The first lawsuit alleges that Lululemon misled investors about the real cost associated with the company's earlier sheer pants issue. It claims that during the time between the announcement of the issue and the newest earnings release, management talked up the speed and efficiency of its problem-solving, while secretly planning to remove CEO Christine Day from office.

Depending on your point of view, Day's departure is either an unrelated event or the second casualty in the sheer-pants scandal. Product Officer Sheree Waterson left in April, in a not-so-subtly timed announcement that coincided with Lululemon's "how we're going to fix this" press release.

The shortage of fabric for the pants caused a meaningful dent in Lululemon's sales last quarter. The company admitted to having to write off $17.5 million of unusable Luon -- the fabric used in the pants -- due to the quality issue. The shortage also contributed to a 90-basis-point product margin decline.

That opened the door for competition, which resulted in a hit to Lululemon's same-store sales growth. In its most recent earnings call, Under ArmourĀ called out the strong performance in its studio line in the first quarter. That line competes with Lululemon's yogawear, and likely saw an uptick due to the market leader's product issues.

Who knew what
The issue isn't how bad the situation is, t