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Lululemon’s material warning: Pants shortage threatens profit

A Lululemon store on Queen St. West in Toronto. Lululemon said Monday it will take a ‘significant’ financial hit as a result of production problems and an expected shortage of its signature black ‘luon’ women’s yoga pants.

Fred Lum/The Globe and Mail

Lululemon Athletica Inc. will take a "significant" financial hit as a result of production problems and an expected shortage of its signature black "luon" women's yoga pants.

The Vancouver-based athletic wear chain said late Monday that a large shipment of its stretchy black pants – long and cropped versions – didn't meet its technical specifications.

The fabric of the pants affected is thinner than it should be, resulting in "a level of sheerness … that falls short of our very high standards."

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Lululemon said it has pulled the items, which make up about 17 per cent of all women's bottoms in its more than 200 stores.

"For the near term there will be a shortage of these styles," the company said in a statement, which was released after stock markets closed.

"We expect this issue will have a significant impact on our financial results."

The announcement of the pant shortage sent Lululemon's stock down about 6 per cent or $4 (U.S.) in after-hours trading.

It's a setback for the fast-growing company, which has defied skeptics by posting industry-leading financial results, even in a tough retail market.

Now, as it prepares for an expansion beyond its mostly North American store base, it will feel the pressure to keep generating strong results as well as flawless products.

The chain downgraded its outlook for its first-quarter results, now expecting revenue of between $333-million (U.S.) and $343-million, from between $350-million and $355-million.

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It dropped its same-store sales guidance at outlets open a year or more – a crucial measure of retail health – to an increase of between 5 and 8 per cent, rather than 11 per cent.

Christine Day, chief executive officer of Lululemon, said the retailer's first priority is to protect the quality of its fabrics so as to keep customers' loyalty. "We will accept nothing less than the very highest quality we are known for."

The company will provide details about the effect the problems will have on Lululemon's 2013 bottom line on Thursday when it reports its fourth-quarter results.

David Ian Gray of retail specialist DIG360 Consulting of Vancouver, said Lululemon latest difficulties are a wake-up call for it as the chain moves to become even bigger and more complex.

The company has to improve its logistics and supply chain to be able to handle a bigger load, he said. "They have to become more proficient at seamless supply chain management," Mr. Gray said. "By virtue of the complexities of sourcing globally, they're going to run into hiccups. The challenge is to address it and correct it."

The manufacturer of the black pants is not a new one but rather the one the chain has used since 2004, the company said, adding it is working with the supplier to determine the source of the problem.

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Customers who bought the pants after March 1 can return the product for a full refund or exchange, it said.

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About the Author
Retailing Reporter

Marina Strauss covers retailing for The Globe and Mail's Report on Business. She follows a wide range of topics in the sector, from the fallout of foreign retailers invading Canada to how a merchant such as the Swedish Ikea gets its mojo. She has probed the rise and fall (and revival efforts) of Loblaw Cos., Hudson's Bay and others. More

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