Is another product snafu on the horizon for lululemon athletica (NASDAQ:LULU)?
That seems like a possibility after a series of complaints appeared on the company's website and Facebook page, specifically about the yoga apparel brand's Astro pant. One woman said that the pants showed pilling after three wears, adding, "I have bought plenty of Lululemon in the past and have never had this problem, my last yoga capris took YEARS to wear out. The other reviewers are right... Lululemon quality sure isn't what it used to be!" Other posters on the company website complained of a similar issue, while some said the fabric was itchy and different from the former luon material.
The refrain that Lululemon's product quality has gone downhill has become a familiar one for its aficionados, and the rumblings come at a crucial time for the fashion label; it suffered a public relations nightmare when it was forced to pull thousands of black luon pants earlier this year, leading to a shortage and lower revenue.
Back in March the company revealed technical problems with the pants that caused 17% of all women's bottoms to be pulled from shelves. The product miscue not only affected the brand image, but also put a significant dent in profits and lend to the termination of Chief Product Officer Sheree Waterson.
Last week, Lululemon named a new chief product officer, appointing the appropriately named Tara Poseley to the post. Introducing Poseley, CEO Christine Day said, "She brings tremendous experience in merchandising and product execution, and her proven track record in product allocation and planning will help us maximize the productivity of each lululemon store." Poseley most recently served as president of Kmart Apparel, and brings 25 years of retail experience to the table.
With this spring's pants recall and the recent complaints, Poseley certainly has her work cut out for her.
"Life is full of setbacks. Success is determined by how you handle setbacks."
The above quote from Lululemon's manifesto would seem to be particularly apropos these days.
Representatives from the company responded promptly to the complaints on its website, encouraging customers to take the product back to the store and reassuring them that "it doesn't sound right to us," and that they "would figure out a way to make this right."
Corporate headquarters, meanwhile, said it had only heard from a "very small number" of customers, and that pilling "is not a widespread concern and this guest feedback is not indicative of a larger issue."
That may be the case, but perception is often reality in business, and Lululemon can ill afford another product setback right now.
Quality-control issues aren't the only hole the company needs to fill. The stock fell nearly 20% when CEO Christine Day announced in June she would be leaving the company, and shares have hardly recovered as no replacement has been named in the nearly five months since she made her decision public. No matter who fills the top spot at Lululemon, Day will clearly leave behind big shoes to fill. In her more than five years at the helm, Day guided the stock to huge returns, led an aggressive store expansion, and maintained double-digit comparable sales growth rates nearly the whole way through. In addition, Lululemon has posted sales-per-square-foot numbers behind only Apple and Tiffany in all of retail. But, perhaps most important, Day had extensive experience in Asia, Lululemon's next frontier, as the director of Starbucks' operations in the Asia-Pacific region for many years.
Lululemon's rivals have not ignored the yoga master's juggernaut-like rise to the top of the industry. Gap's Athleta, in many ways a clone of Lululemon except for the cheaper price tag, is expanding rapidly, and Nike and Under Armour have both said publicly that they see the women's market as a major opportunity, and are planning to spend more marketing and design dollars to focus on the fairer sex.
Foolish bottom line
Lululemon may be correct that the recent complaints are just isolated incidents, but the brand has already taken a bruising this year with the pants recall in the spring and Day's surprise resignation this summer. With a P/E near 40, the stock still has plenty of room to fall, and yet another product failure may be too damaging for the brand to recover from with its reputation fully intact. Lululemon won't report earnings for another month, but investors could use some good news before then. A pre-earnings announcement or an update on the CEO search in the new few weeks could give shareholders the reassurance they need and deserve. Otherwise, this stock could be left overstretched.