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Weighing the Good and the Bad of Lululemon Athletica inc. (LULU)’s Latest Mishap

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Last week’s news concerning the opacity of certain Lululemon Athletica inc. (NASDAQ:LULU) yoga pants caused the stock to take a significant dip. While the PR department is getting quite the workout these days, it’s done a great job of handling the quality control issue. The story seems to have more legs than most company setbacks, as it hit mainstream media outlets, and became more than just a financial story. Weighing the good and the bad, this looks like a buying opportunity for long-term investors.

Lululemon Athletica inc. (LULU)

The bad

By now, most everyone knows the bad news. The Luon pants sold at Lululemon Athletica inc. (NASDAQ:LULU) stores after March 1 suffer from a sheerness issue. The company issued a recall that will cost it up to an estimated $60 million in lost sales.

More importantly, it provides competitors such as The Gap Inc. (NYSE:GPS) and Under Armour Inc (NYSE:UA) an opening in a market each has been trying to move into. With the popular pants out of stock indefinitely, Lululemon Athletica inc. (NASDAQ:LULU)’s message of “come back later” sounds more like “search somewhere else.”

Gap has been capitalizing on Lululemon’s growth since 2009 by opening Athleta brand stores in locations near Lululemon Athletica inc. (NASDAQ:LULU)’s stores. It’s one of the fastest growing segments for the company, as they opened 25 new stores last year, and have plans to open 30 new stores in 2013. These stores are likely the next best thing for loyal Lululemon customers.

Under Armour, for its part, is doing its best to capitalize on the competition’s faux pas as well. Its website homepage now features women in yoga pants and capris as the first thing you see when you log on. While the company is best known for its men’s athletic wear, it’s been slowly making moves to expand its share of the women’s wear market, as it presents one of the company’s biggest growth opportunities.

On last week’s earnings call, Lululemon Athletica inc. (NASDAQ:LULU) CEO Christine Day may have made things worse by stating, “The truth of the matter is the only way that you can actually test for the issue is to put the pants on and bend over.” There’s been plenty of media backlash based on this quote alone, as well as Facebook accounts of customers being asked to bend over by sales associates. So much so that the company had to release a statement that sales associates should not be asking customers to prove the item is affected before taking the return.

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