* See-through black pants pulled off shelves this week
* Company sees Q1 EPS $0.28-$0.30, vs $0.32 a year earlier
* Sees Q2 same-store sales flat or up by "low single digits"
* Same-store sales rose 10 pct in fourth quarter
* Shares rise 1.7 percent to C$66.47 in Toronto
(Recasts, adds total profit impact in first paragraph.)
By Allison Martell
TORONTO, March 21 Yogawear chain Lululemon
Athletica Inc said on Thursday it could lose up to $40
million in profit this fiscal year because of its decision to
pull defective workout pants from its shelves.
Despite the profit warning, Lululemon's shares rebounded
slightly from a sharp decline earlier this week, when the
company said it had discovered some of its signature stretchy
pants were too easy to see through and customers could return
them for refund. It said there would be product shortages as a
Investors may have feared worse damage and may have been
reassured by Lululemon's report of a fourth-quarter profit that
was slightly higher than it had forecast.
"I think it's relief about the magnitude of the potential
impact," said Credit Suisse analyst Christian Buss on the stock
move. "If we strip away this recall, the core business is still
healthy, and we have a validation of that with these results."
Chief Financial Officer John Currie said the company would
probably feel much of the recall's impact in the second quarter,
from May to July, when sales in established stores will show
little change or grow by a percentage in the "very low single
digits." That's a sharp slowdown from a year earlier, when
same-store sales rose 15 percent.
"This has been a challenging time for all of us," Chief
Executive Christine Day said on a conference call with analysts
and investors, adding later that her team was "devastated" by
what had happened.
Lost revenue, a writedown of the recalled goods and other
costs will reduce earnings by 11 cents to 12 cents a share in
the current quarter, the company said, and between 25 cents and
27 cents a share for the full year.
REACHING FOR QUALITY
The defective pants, the second quality issue disclosed by
the company in less than a year, could also undermine Lulu's
reputation for selling workout clothes that last for years. In
July, the company said it was working on problems with dye
bleeding from some bright garments.
Day said Lulu is rethinking how it tests products: "The
truth of the matter is the only way you can actually test for
the issue is to put the pants on and bend over," she said.
Lululemon has a team on site with its suppliers, working to
find the cause of the problem, she said, adding that it had
recently "added strong leadership" in quality control.
Day stopped short of blaming suppliers, and said problems
could have arisen at any of four manufacturing stages, involving
multiple vendors. She also said the mistake could have been
Lululemon's, in something related to a new pattern, for example.
Credit Suisse's Buss questioned Lulu's communications
strategy. He noted that the company has not posted the recall on
its Facebook page or on the front page of its web store, and
said it does not seem to be reaching out to fan sites that track
its product launches.
"The big risk here is that they alienate their core
customer, and I'm clearly not a crisis management expert, but
this seems somewhat lacking," he said.
RIVALS SEE OPPORTUNITY
Brian Sozzi, chief equities analyst at NBG Productions, said
Lulu's forecasts may prove too optimistic.
"It looks like they're expecting a return to their glory
days by the mid-year," he said. "I can't necessarily believe in
that, because for the first time now they've opened the window
Lululemon effectively created the market for premium women's
athletic wear with its form-fitting pants, colorful tank tops
and pricey sweatshirts. But in recent years a cluster of
competitors have rolled out more yoga and running wear.
Shortages of the black pants, a core product for Lululemon,
may send customers to brands like Under Armour, Nike Inc
and Gap Inc's Athleta banner, which typically
offer lower prices.
PROFIT TO FALL
Lululemon forecast first-quarter earnings per share of 28
cents to 30 cents, down from 32 cents a year earlier.
Net income for the fourth quarter ended Feb. 3 rose to
$109.4 million, or 75 cents a share, from $73.5 million, or 51
cents, a year earlier. The company had said it expected earnings
of 74 cents a share.
Revenue jumped 31 percent to $485.5 million, just above
Lulu's forecast of $475 million to $480 million.
Sales at established stores, a key measure for retailers,
rose 10 percent. The company had forecast a gain in the "high
Shares rose 1.7 percent to C$66.47 on the Toronto Stock
(Editing by Maureen Bavdek, Chizu Nomiyama and Peter Galloway)