After a forgettable couple of years that were marked by a massive pants recall, Lululemon Athletica (LULU 0.63%) shares are up more than 60% in the past year as sales growth has returned.
However, now another product recall threatens the brand image once again. Late last month, the yoga specialist issued a recall for over 300,000 of its hooded tops due to incidents in which the elastic cord was whipping the wearer in the face when pulled or caught on something. The U.S. Consumer Product Safety Commission said seven people had reported injuries to the face and eyes in its recall announcement.
Unlike the previous product recall, Lululemon said the financial impact from the cord issue will not be material, and as a remedy, customers could either remove the cord from the top or request a non-elastic replacement cord in-store or via mail. In a statement, the company said, "Our main priority is ensuring our product works for our guests, and we believe this is the necessary proactive action. We assessed and accrued for the financial impact ... and do not consider this to be material to our business."
Not all recalls are created equal
Though the recall headline may scare investors, this is a much different situation than the previous one, which involved its trademark luon pants being too sheer. That manufacturing error caused the company to not only recall thousands of pairs of pants but to also pull an estimated 17% of its pants inventory from stores at the time of the announcement in March 2013, leading to a supply shortage and a decrease of around $60 million in sales and $0.25 in earnings per share.
Subsequent setbacks for the company included the surprise resignation of CEO Christine Day and offensive remarks about women from founder Chip Wilson. Wilson is no longer involved with the company, having sold the remainder of his stock earlier this year, and new CEO Laurent Potdevin has settled into his role with the company beating earnings expectations in the last four quarters as the stock has recovered.
The scale of this recall is much smaller than the pants incident as this only affects the drawstring, and only seven incidents have been reported. In the case of the sheer pants, thousands of customers may have been unaware that their bottoms were too see-through, which led to significant public backlash.
Challenges are still ahead
While the stock price has moved up from its lows last year, the company is still facing challenges. Earnings per share is expected to be nearly flat this year due in part to a stronger dollar and thinner margins, caused by changes in product mix and increased manufacturing costs.
Still, the company is in the best shape it has been since the pants debacle, thanks in part to growth in its men's segment and e-commerce. Online sales jumped 31% in the most recent quarter and has been a consistent engine of growth since it was introduced several years ago. Sales of men's gear increased 19% on a comparable basis, and its ivivva stores, which sell dance-inspired clothes for girls also performed well in the quarter with a 29% increase in total comparable sales, which includes online business.
For investors, the bottom line here is that the elastic cord recall should not be a concern and is unlikely to affect performance. Because it is such a small item, the replacement costs are minimal, and though the news may be embarrassing considering the controversy in 2013, this is a minor hiccup, and Lululemon's overall momentum should not be affected.
