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Sheer bad luck

It’s not just Lululemon’s pants; revenues forecast to be thinner than expected, too

Retailers best known for making one product are, unfortunately, rather dependent on that product succeeding all of the time.

And so yoga pants giant Lululemon—maker of stretchy clothes but best known for butt-flattering $98 trousers—has warned its sales for the three months to March 21 will miss forecasts because a big shipment of pants made from its signature “Luon” fabric were too sheer. It is pulling the see-through offenders out of stores.

The supply chain glitch occurred because Lululemon relies on a single Taiwanese manufacturer for its Luon fabric, according to its latest annual report (pdf, page 12). Single supplier-reliance ensures Lululemon’s manufacturing know-how does not get spread too widely, but also creates risks of bad shipments spoiling sales performance.

But this is only the latest piece of bad news from the once hyper-successful Canadian sportswear firm. In January, it also reported sales that missed Wall Street’s estimates, raising concerns growth was tapering off after 13 successive quarters of double-digit gains in same-store revenues.

Lululemon’s main problem is rising competition.

Since the fall of 2011, bigger groups including Gap and Nordstrom have rushed to replicate Lululemon’s success—and for cheaper. Gap, for example, sells stretchy pants for $69 from its “Athleta” range. Gap is also setting up “Athleta” branded stores near Lululemon outlets and has borrowed the strategy of running yoga classes to attract customers.

That looks like brazen copycat retailing, but there’s little Lululemon can do. Its trademarked Luon fabric aside, as Forbes has noted, Lululemon “has no barriers to entry to keep the competition out.” While its yoga pants have been a runaway success, it is not unusual for yogis to own a couple of pairs of the $98 wonders—and hardly seeking to replace them yet.

According to Bloomberg, Lululemon’s shares are trading at a forward price/earnings ratio of 36 times. That compares to 20 times for Nike and 14 times for Gap. For a company with competitors closing in, and overly reliant on one supplier, the rating seems far too high.

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