November 15, 2007 / 10:46 PM / 11 years ago

Lululemon stock submerged by seaweed-wear doubts

OTTAWA (Reuters) - Investors soured on Lululemon Athletica (LULU.O) LLL.TO stock on Thursday, a day after a news report questioned the hip workout wear retailer’s claims that the fabric of some of its clothing contains healthful seaweed.

The company has come under scrutiny after the New York Times said it commissioned a laboratory test of Lululemon’s Vitasea line fabric, which the retailer says contains seaweed.

The Times said the test, prompted by inquiries made by a short-seller of Lululemon stock, showed no major difference in the mineral levels of a Vitasea T-shirt, said to contain seaweed, and a plain cotton T-shirt.

Lululemon shares fell more than 6 percent to $41.50 on Nasdaq on Thursday and about 5 percent to end at $40.80 on the Toronto Stock Exchange. The stock had also taken a big dive on Wednesday, but rebounded late in the session for a modest gain.

Lululemon says its Vitasea clothes are made partly with SeaCell, a fiber made with seaweed that releases amino acids, minerals and vitamins into the skin on contact with moisture. SeaCell is also claimed to lower stress and provide anti-inflammatory, hydrating and detoxifying benefits.

SeaCell is made by German company Smartfiber AG.

Lululemon management told Blackmont Capital analyst Barbara Gray that it has been contracting lab testing to SGS SA SGSN.VX, a big testing and certification group, in Switzerland for more than a year and that June tests showed the fabric met its specifications.

Lululemon also said that Smartfiber audits its factories, Gray wrote in a note. Vitasea makes up 3 percent of Lululemon products, she said.

“Management is honoring returns but has no plans to pull them off the shelf,” she added.

Lululemon and its investor relations department did not respond to calls from Reuters, but a public relations firm representing the company issued a statement late on Wednesday.

“Lululemon is a company of integrity that strives to maintain a culture of transparency and openness. We stand behind our products,” it said.

“All of our products go through rigorous testing including our Vitasea fabric and that process has been in place for a year. We are taking this situation seriously and will provide full information to further clarify this matter as soon as we receive it.”

RBC Capital Markets analyst Tal Woolley said Lululemon could “do a mea culpa” and refund or exchange the clothes, or offer compensation.

“This is a quality assurance issue that speaks to concerns that some investors had about whether the back office is ready to support the expected growth ahead for Lululemon,” he wrote in a note.

($1=$0.98 Canadian)

Reporting by Susan Taylor; Editing by Peter Galloway

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