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.
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.
The good
For all the bad news surrounding the company, it seems Lululemon Athletica inc. (NASDAQ:LULU) made the best out of a bad situation.
For one, the media attention of such a salacious story increased its brand recognition. While Lululemon may be well known among the more affluent clientele of sunny states, it’s still far from ubiquitous with yoga pants. The story gives consumers everywhere a glimpse at the brand image Lululemon has cultivated over the years – attractive people wear our clothing.
Furthermore, by getting out ahead of the story quickly and controlling it, Lululemon is showing that quality is still its main focus. The message is these pants do not meet our high quality standards instead of Lululemon is making lower quality pants. In the long run, this open communication builds customers trust.
This compares favorably to a recent PR moves from another high-quality vendor – Apple Inc. (NASDAQ:AAPL). When Apple released its new mapping service for iOS 6 in September, it faced a bevy of backlash from media sources citing customer complaints regarding lack of clarity and accuracy. In response, Apple effectively told customers it knows people don’t like it, but stick with it, and it’ll get better. To its credit, the app has gotten better–but releasing an inferior product, and then practically admitting the company knew it was inferior, was not its best PR move.
A buying opportunity
This isn’t the first setback the company has had in terms of its quality, and, in all likelihood, it won’t be its last. As an investor with a long-term outlook, I see this disruption as a buying opportunity.
RW Baird released the results of a survey on Monday suggesting that the recall “is not likely to permanently impair its sales trajectory.” While the company will certainly see a sales hit on its first quarter, which it’s already adjusted its outlook for, the long-term growth prospects still look strong. If the company’s handling of this PR story is an indication of how well it can execute its strategy – I believe it is – I want to get in on any major pullbacks in the stock price.
The article Weighing the Good and the Bad of Lululemon’s Latest Mishap originally appeared on Fool.com and is written by Adam Levy.
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