Lululemon supplier says recalled yoga pants made to specs

HONG KONG/TORONTO - The Taiwanese supplier behind the see-through yoga pants recalled by Lululemon Athletica Inc said on Tuesday it followed design specifications and the Canadian retailer had merely misjudged customer tastes.

Lululemon said late Monday it had recalled batches of its stretchy black signature yoga pants because of an unacceptable "level of sheerness" created during the manufacturing process.

Shares of Lululemon fell 4.6 percent to 64.38 on Tuesday as analysts trimmed their expectations on the clothing maker a day after it warned the recall would significantly affect results.

Eclat Textile Co Ltd, a supplier for Lululemon for more than 10 years, told Reuters that "a gap between Lululemon's expectations and reaction from the market" was the cause of the problem.

"We checked our orders this morning and indeed, we did follow their instructions to make the product," said Roger Lo, a spokesperson at Eclat. "Lulu has some new ideas every year, such as taking different approaches for fashion-related purposes."

"Lululemon introduced the product to the market and their customers are not comfortable with its opacity."

Lo said Lululemon had not contacted Eclat regarding the issue, but Eclat was willing to adjust production according to the retailer's needs. He said any changes would not be due to quality issues.

The affected items represented approximately 17 percent of all women's bottoms in its stores.

Shares of Eclat fell 1.6 percent in Taipei on Tuesday, lagging a 0.4 percent gain in the benchmark TAIEX index.

In its annual report in March 2012, Lululemon, said it was at risk of overly relying on a limited number of suppliers. The company said Luon, the fabric at issue in the recent withdrawal, was supplied by a single manufacturer in Taiwan.

Still, it was not immediately clear whether Eclat manufactured all of the fabric that prompted the recall, or if another manufacturer was involved.

A spokeswoman for Lululemon could not be reached immediately for comment.

The issue is the latest in a series of quality control woes that the pricey women's workout gearmaker has faced in the last year.

"With the black Luon pant recall Lulu has now had its fourth quality control issue in the last year," Credit Suisse analyst Christian Buss said in a note to clients. "We see some potential that Lulu risks alienating its core customer base should quality control issues persist."

Lululemon recently experienced problems with another set of light colored pants. It is selling the pants with a disclaimer: "You may experience sheerness with some of our bright-colored bottoms because of the lightweight nature of the fabric. We recommend you do a couple of Down Dogs in your bright-colored bottoms to ensure you're happy with the fit and coverage."

CUTS SALES FORECAST

Several analysts cut price targets and earnings expectations for the company.

Janney Capital Markets analyst Adrienne Tennant trimmed her price target to $71 from $80, and was cutting her earnings expectations to "give management breathing room to properly address and fix the issue."

Lululemon said it now expects fiscal first-quarter sales of $333 million to $343 million, down from its prior forecast of $350 million to $355 million.

Comparable-store sales growth will also be affected, with growth of 5 percent to 8 percent in the quarter, it said, down from the 11 percent it had expected up to March 17.

The company is trying to determine the impact on first-quarter earnings, as well as the expected impact on results for the rest of 2013.

The warnings prompted price target cuts on Lululemon's stock from Wedbush Securities, KeyBanc, UBS, Sterne Agee, Canaccord Genuity and other brokerages on Tuesday.

International Strategy and Investment Group analyst Sam Lee said in a note to clients that Lululemon's woes are due to teething issues in an immature supply chain.

"We would really like to see the company more aggressively invest in and exercise greater control over its supply chain given the importance of quality and consistent fit to the Lulu brand promise," said Lee. He added that the pullback in Lulu's stock still presented a buying opportunity.