Lululemon Poised To Pop After Ironing Out Pants Issue

Jun. 5.13 | About: Lululemon Athletica (LULU)

Lululemon (NASDAQ:LULU) has finally restocked its popular black yoga pants. The style, called Luon, was pulled in March after complaints that they became see-through when the wearer bent over. The fabric's manufacturer, Eclat Textile, said that it manufactured the pants according to Lululemon's specifications while the latter blamed the manufacturer. In any case, the defect affected 17% of the Vancouver-based company's yoga pants line. And, they have not been the only Lululemon products subject to a sheerness issue (check out comments on the company's blog here).

But, the effect on the company's stock has been slight. Part of the reason is the way the company handled it -- with a sense of humor and good grace.

Share Price

The end result has been a company that is up more than 7% year-to-date and climbing. Right now, the stock is trading at $80.48 on a 52-week range of $52.20 to $82.48. While the consensus is that Lululemon will sink to $78.68 over the next year, I think the estimate is off. ISI Group analyst Omar Saad put a price target of $100 earlier this year, and think that is pretty accurate.

Growing Pains

The ISI Group analyst explained the situation at Lululemon very well after the March recall, saying that a company would have a hard time increasing sales by more than 25-30% a year (which Lululemon has done) without sacrificing quality.

"The company's tiny supply chain clearly has been overworked to build inventories and chase [sales] growth . . . which likely led to corner-cutting at suppliers and subsequent quality control issues," said Saad." "It is becoming increasingly clear that Lulu needs to step in and take a more direct interest in its supply chain in order to regain control over its quality." And it sounds like that is exactly what the company has been doing.

Company Reaction

In the blog post announcing the return of the popular black yoga pant, Lululemon explained its efforts: "First, we added tighter new standards and specifications to our testing and development. In fact, your stretchy pants go through about 15 tests to make sure you get great ass coverage (that's the scientific term)."

"And speaking of science, we even got some university scientists to help us developed a "sheer-o-metre" which measures the amount of light coming through the fabric while being stretched at varying degrees. We've also re-engineered our luon bottom patterns in each and every style to minimize the stretching of the fabric. Basically, that means there's now more fabric across the bum so it's not stretched from the get-go." The company also revamped its size guide to include fitting tips such as "if there is an underlying sheen that reflects the light, this means the fit is too snug."

Conclusion

As Lululemon gets to the bottom of the issue (pun intended), expect to see the company's share price rise. After all, it just got back 17% of its product line.

This is a company which was able to maintain share price after a recall that cut almost 1/5th of its product line. It stands to reason that adding those products back in, especially something as basic as a black yoga pant, is bound to show on the company's bottom line, and be realized ultimately in increased shareholder value.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.