In one of my predictions for 2013, I suggested that Lululemon (Nasdaq:LULU) would have its first negative annual return in five years. Well on its way down 16% year-to-date through March 19, I never would have imagined that the lifestyle apparel company would be felled by the very product that brought it retail superstardom. Forced to withdraw its popular yoga pants because of their see-through, it will lose as much as 17% of its inventory of women's pants.

Is this just a one-off mistake or is it time to see through Lululemon?

Quality Control Is Ongoing Issue

This latest gaffe isn't the first time it's had a problem with the quality of some of its products, but it certainly seems like its biggest mistake to date. In a note to Credit Suisse clients, analyst Christian Buss said, "With the black Luon pant recall Lulu has now had its fourth quality control issue in the last year. We see some potential that Lulu risks alienating its core customer base should quality control issues persist."

Ya think?

This is a company that has always prided itself on quality eschewing low prices. In a March 26, 2010, article in the Globe and Mail, CEO Christine Day suggested Lululemon successfully traversed the recession by making some tough calls shortly after she took over running its business. Jennifer Black, a retail analyst in Portland, Oregon, believes Day brought some focus to the company. In Day's words: "It meant getting grounded in our strategic advantages and opportunities, and getting the execution on track." But really it meant maximizing profits for shareholders.

Core Customer

Lululemon Addict is a blog that covers everything Lulu and has since 2008. In a March 19 article, the unknown author (quite possibly founder Carolyn Beauchesne) points out that the quality control issues started shortly after Day joined the company. Management, with Day leading the charge, ruined everything special about Lululemon, most especially its quality. Choosing maximum profits over unique products, Lulu's become generic in nature with little differentiation between itself and brands like the Gap's (NYSE:GPS) Athleta and VF Corp's (NYSE:VFC) Lucy Activewear. This latest problem could be an indication of how little Day cares about its "core customer."

Carolyn Beauchesne claims that she has spent more than $15,000 in its retail stores. If anyone is a core customer, it's her. So, the fact that she's calling for the ouster of Day is proof positive that the former Starbucks (Nasdaq:SBUX) executive doesn't know jack about manufacturing apparel. It's been one blunder after another; if the devoted can see it, it's only a matter of time before the worm turns. At that point it's game, set and match.

Full Disclosure

In my first article about LULU back in March 2009, I finished by suggesting it was a steal at $5 per share. I also said it was a good thing Lululemon didn't buy Athleta at the time because it would have added too much debt. While that's true, it also would have eliminated some serious competition. The decision by Day to go it alone in e-commerce instead of buying a ready-made solution is looking like a huge mistake at this point. In hindsight, we should have seen this as the action (or inaction in this instance) of an inexperienced CEO.

However, that's water under the bridge. What really started to irk me about the company was the way in which it disseminated information to investors. Every quarter it seemed to present information in a slightly different way to highlight those numbers it wanted us to focus on. In my March 2, 2010 article, Deciphering Lululemon's Cross-Border Sales, I questioned why it didn't present specific information about its U.S. sales like it did for Canada despite the fact that 39% of its overall revenue was south of the border. We'll never know if it was intentionally vague in its disclosure or simply ill equipped to handle investor relations on a larger scale.

Trust and Respect

What we do know is that three years later Lululemon has a lot of explaining to do. While some in the press are talking about how it's getting ahead of the story by recalling the pants in question and providing refunds, I find it amazing that it's been more than willing to throw Eclat Textile Co. Ltd., its supplier of more than 10 years, under the bus for a problem that clearly is of its own making. It's another example of weak leadership. You don't question a trusted and valued partner in open conversation. The mere insinuation that the error occurred in the manufacturing process shows a complete disrespect for the process. The truth always comes out in the end so why say anything detrimental until all the facts are known? Good luck trying to find new suppliers.

Christine Day Must Go

Every dog has its day. Christine Day took a company that wasn't very corporate and made it so. But by doing that she may have ruined its specialness. Lululemon Addict's Carolyn Beauchesne is 100% correct when she states, "It's time to bring in a new CEO, with a commitment to quality, who has experience in the apparel industry and an eye for style."  

If you own Lululemon stock it's gut-check time. I certainly won't be buying. And if it doesn't weather this storm, which is only just beginning, it will be back to $5 as fast as you can say Chip Wilson. 

At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.
 

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