Bent Over
I’m far from Woodward and Bernstein, but I found it a little strange when CNBC was inundated with stories last week about Lululemon recalling a significant amount of their yoga pants because they were deemed too “see-through.” CNBC was interested because the apparel maker stated this recall could lead up to a loss in upwards of $60M. Especially interesting was the announcement of the recall came less than a week before Lululemon’s quarterly earnings call with their shareholders. Lululemon stated they would be recalling up to 17% of their women’s pants. Since that announcement, the stock price has dropped roughly 10%, but could this recall have just been a planned announcement to use as a crutch for soft earnings?

The Taiwanese supplier of the pants in question, Eclat Textile Co, isn’t exactly siding with Lululemon during the controversy, with the below quote coming from their CFO, Roger Lo:

“All shipments to Lululemon went through a certification process which Lululemon had approved, all the pants were manufactured according to the requirements set out in the contract with Lululemon.”

Upon reading further into the story, Lululemon has been under fire by their fans for some time, being accused of shifting to lesser quality materials and still charging the same prices.

Cristina Chalmers, who lives in Vancouver, BC, the same city as the Lululemon headquarters, writes a blog called Lulumum. Below is what she wrote the day the recall was announced:

“I’m really not sure what is going on with this new shenanigan of a press release but I’m not buying it. Nor is their manufacturer accepting the blame for something they say Lululemon has mandated and signed off on. So what then is behind this press release?? Is this merely a convenient scape goat for lack luster sales (caused by a long endured lack of quality)?”

Another popular Lululemon blog, Lulu Addict, which is run by Carolyn Beauchesne, chimed in on the day of the recall:

“Anyway, it’s very odd that lulu chose to pull pants now when they’ve been having sheerness issues for well over a year, in many different fabrics besides luon (cotton, luxtreme, luon, seamless) and in colors other than black. I have to assume these pants were really crappy.  It’s also weird they would do a recall right before their quarterly conference call on Thursday.”

Lululemon itself was quite aware of the problem, going so far as to put a disclaimer on their website over six months ago for certain pants that they may indeed be see-through:

Screen Shot 2013-03-25 at 2.08.48 PM

What’s difficult to understand is Lululemon stating that over 17% of the women’s pants are affected, but the only see-through pants are black. These pants could be back in stock within four to six weeks, but on the earnings call they stated both Q3 and Q4 will be negatively impacted by the recall and the full year guidance has been reduced by over 10%. It just seems to me the reduction in the outlook is a bit overblown due to this ‘recall’. Many people feel Lululemon is trying an interesting brand management approach by floating out this long known problem just before the earnings call to compensate for a drop in sales, as well as to get their name in the news.

Add to it the fact that our short attention span society loves sensational as well as spicy headlines. As a result, this news story has made for a boatload of tremendous puns, and I will do my best to work in as many as possible in the following paragraph:

The conversation about a loss in revenue may seem tongue and “cheek’, but indeed is important. It just seems Lululemon may be ‘stretching the truth’ as to whether this will hurt the ‘bottom line’ or if it is just a ‘cover up’. I can tell you the last thing Lululemon needs right now is to get a ‘bum’ rap and become the ‘butt’ of all of the jokes in the news. Let’s be honest, investors love ‘transparency’, but this is truly ‘unwanted exposure’ for the company and really has put them in a ‘compromising position’.

All kidding aside, at the end of the day, sex sells. I can just about guarantee there wasn’t a single man in this country who didn’t read this story and think one of two things (or both):

  1. “See-through yoga pants, what’s so bad about that? Show me some examples!”
  2. “Wait, are you telling me my wife/girlfriend spends $100 on a single pair of those pants?!?”

The company is now on the minds of the greater public, which is a great way to spur purchases from people who previously didn’t understand the brand completely.

While the story has created some backlash by the true fans in terms of quality concerns that have been going on for some time, it opened some other doors. First of all, it gives them an event to attribute their lackluster growth in comparison to last year’s numbers. In 2012 sales were up by 11% for stores have been open for a year. After this announcement they are forecasting a growth of 5%-8% this year. Having an event like this may hurt shareholder value in the near term, but they can restock the shelves in less than a couple of months.

More importantly, it gives Lululemon the chance to take a step back and reassess their quality issues that customers have been complaining about for some time. Now they can send the message to their customers through all channels that they are taking a serious stance on quality control. They can put out messages on Twitter about new fabrics, have a story on Facebook about how the manufacturing is being more closely watched that ever before, etc. It gives them an opportunity to create a whole new marketing angle, not only showing that quality is deemed as their number one priority, but also that they don’t take themselves too seriously.

Transparent

While Lululemon will undoubtedly deny they had any ulterior motive for the recall, it is a great play for a company that got where they are by building a relationship with a community through word of mouth and yoga classes. They can now reengage themselves with that community by making quality a priority and humanize themselves a bit by poking fun at what has taken place. They can also hope the strategy helps jumpstart the slowing sales to keep their shareholders pacified. However this ends up, I applaud Lululemon for what appears to be some creative reputation management, and also for creating a topic that was quite exciting for a man in his 30s to research.