More Quality and Competitive Worries for Lululemon

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Lululemon Athletica Inc. (NASDAQ: LULU) has suffered after its see-through yoga pants debacle. Many analysts downgraded the stock, and now we are seeing more analyst caution in the stock. We have not seen the formal downgrade’s full notes this morning from RBC Capital Markets, but we have details on a Neutral rating with much caution from Stern Agee’s Sam Poser.

The analysts at Stern Agee worry that the casualties of growing pains were first the Luon pants debacle and now Sheree Waterson has left as the role of chief product officer. Investors will focus on the two bits being tied together, and the obvious worry is that something has gone very wrong in the designs. Guess what that will do for future sales.

Changes supposedly are being put into place to ensure that product quality lives up to all company standards. Complaints about sheerness were approximately 1%, but in mid-March they were up to 10% and the pants were pulled from the stores. Stern Agee’s note said:

There is an outside chance that new up to standard Luon pants could be in stores in 4 to 6 weeks. The product testing was near completion under the new standards, and new product was in production. However, Lululemon needs new production capacity so not to interfere with fall 2013 production, which is in high gear. Ms. Waterson was well thought of, but was not the person to scale up the organization for its future growth. Her job will be split going forward into a head of design and head of production. LULU should provide further updates in 4 to 6 weeks.

Further updates in four to six weeks? Room for more warnings ahead. See below for further continuation of that theme.

The analysts think that pulling the Luon pants from the stores was absolutely necessary to keep the brand image from being destroyed. The firm does not know how long the fix will take, and the report shows that Stern Agee expects that increased air freight costs will negatively impact the balance of 2013.

Here is the quote that hurts the most about sales now: “Based on our store checks, there are very few black pants left in the stores, and virtually no 4 way stretch pants, which are best for yoga, and store sales are already suffering.”

While the firm thinks that Lululemon handled the sheer issue quite well for its guests, it fears that some customers are likely to try pants from competitors.

Lululemon shares were down to $63.55 in premarket trading on Thursday, against a 52-week range of $52.20 to $81.09.

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