Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Lululemon Athletica inc. (LULU)’s Revenue at Risk in Product Recall: The Gap Inc. (GPS), Under Armour Inc (UA)

Yogawear retailer Lululemon Athletica inc. (NASDAQ:LULU) announced that it would be pulling some of its core products off the shelf based on concerns about product quality. The company announced that its pulling some of its black Luon pants — the company’s iconic yoga pants line — after it determined that a recent shipment was too sheer. The pants account for 17% of the company’s total inventory of women’s bottoms, and the recall is going to hit the bottom line in a big way.

Lululemon Athletica inc. (LULU)

Through the announcement of the recall, lululemon was on track for an 11% increase in comparable store sales. That was already a drop from the 18% increase seen in the third quarter, and on Friday, investors will hear how the fourth quarter turned out. But the shortage is going to hammer those sales, driving comparable growth down to between 5% and 8%. That’s a huge fall, and it opens up lots of opportunities for competitors to move in on the valuable turf.

Waiting in the wings
The two biggest threats to Lululemon Athletica inc. (NASDAQ:LULU) have to be The Gap Inc. (NYSE:GPS) and Under Armour Inc (NYSE:UA). Gap is pushing hard for growth in its Athleta line, and the company has said that it plans to almost double the number of Athleta stores this year from 35 to 65. The Gap Inc. (NYSE:GPS) sells a similar yoga pant for women that retails for 15% to 20% less than the lululemon line. The brand has seen excellent growth over the past year, and a month without competition from lululemon could make a huge impact on the brand’s revenue for the quarter.

At every possible opportunity, Under Armour Inc (NYSE:UA) has said that it plans to grow its business into a more gender-balanced model. The ultimate goal is to get an even revenue split from its men’s and women’s lines. This is a chance for Under Armour to push its range of yoga and studio pants, which cost about as much as Athleta’s pants. For Under Armour, the opportunity comes at an excellent time, as the company has announced plans to front-load its 2013 marketing campaign, meaning that it has the capability to really jump on Lululemon Athletica inc. (NASDAQ:LULU)’s setback.

Still waiting
Those are opportunities that neither company can afford to just let slip. lululemon has estimated that the shortfall is going to result in a $12 million to $17 million decline in revenue in its first quarter. If The Gap Inc. (NYSE:GPS) picked up those sales, it would be about a 13% increase in revenue for its Athleta segment over the last quarter. For Under Armour Inc (NYSE:UA), the company has said that women’s apparel accounts for about 30% of the total apparel revenue. Last quarter that would have been about $120 million. Adding over 10% to that line this quarter would be fantastic. Here’s the thing — neither brand seems to have made a big move.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.