by Cristina

Lululemon Q4 2012 (post ‘Pantsgate’)

March 22, 2013

Today was the Q4 2012 earnings call for Lululemon, and much anticipated after their Monday evening press release  in which Christine Day stated there had been  manufacturing problem with it’s black luon pants resulting in them having to pull items off the shelves and halt manufacturing until they got to the bottom of the issue. I have felt all along that this is a red herring tactic, and it seems many of the analysts are also left wondering about the strange press release. It was interesting to hear Christine Day back peddle today on her initial claims we have used the same manufacturing partner on key fabrics since 2004. This event is not the result of changing manufacturers or quality of ingredinets. We are working closely with them to understand what happened during the period the products where madeThese remarks left the blame soley at the foot of the manufacturer which resulted in Eclat Textile Co releasing their own press release in response (after their own stocks suffered as a result of Lululemon’s press release). Today, Christine Day said that If the mistake was ours through some sort of pattern change or whatever, then obviously we are on the hook for that’ and also claimed that it could have been any number of their manufacturers, not any specific one (although you would think they would know where that specific shipment came from) It was interesting to learn just how far reaching this luon problem will be for lululemon, as they claim their manufacturers are currently in production for Summer 2013, which means that that inventory is potentially also effected by this ‘bad batch’. Since luon is used in other garments (tanks, jackets etc) does this mean we will see issues with those products as well? how is it that it’s just the black luon that was effected? I know we’ve identified several instances of sheerness in colored and printed luon (Dune Petite Dot CRB, power y’s made out of luon ‘light’, pop orange WU’s and the Mellow Lemon WU’s that went straight to outlet along with Pop Orange and Faded Zap In The Flow Crops, just for a few examples). Christine Day had also said it was a real mistake, particularly in the canadian market, to eliminate the $100 thicker cotton items (cuddle up, special edition scuba hoodies, limited edition scuba hoodies and Cuddle Ups) during the Christmas season so they will be returning for Winter 2013. Also, there will be another swim and cycling capsule along with a golf capsule. A big variety of mens polos in both athletic fit and slim fit, and expanded men’s line and a more accommodating fit

Some high lights from the question and answer period:

Analyst – “how did it get to where it was shipping without somebody trying on a pair of pants, like the first batch, to make sure that this wasn’t an issue, and stopping it before it got so out of control?” Not so hot answer, “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. Just putting the pants on themselves doesn’t solve the problem. So it passed all of the basic metric tests, and the hand feel is relatively the same. So it was very difficult for the factories to isolate the issue, and it wasn’t until we got in a store and started putting it on people that we could actually see the issue.” So either lululemon did do quality checks on this batch and where satisfied with the product or they had inadequate quality checks and relied on customers and front end staff to identify problems. According to Eclat Textile Co. Lululemon does a certification of the product before it gets sent out. 

Christine Day- Absolutely. Project Canary, as we’re referring to it. We have made significant investments since last year. The issue you’re referring to, the dye issue, where we brought the experts in, rewrote the whole process for dye, and working in partnership with our manufacturers solved the problem. So we no longer have dye issues, and so we can very much say that with confidence.And I feel that we will accomplish the same thing here with the fabrics once we identify exactly where in the chain the breakdown was, and have long term solutions for this. The big shift for us is making sure that we have people actually on site in the mills and the other environments, and that’s the infrastructure that we started investing in this year. And we’ll continue to do so this coming year. This is amazing to me because the dye issue went on for quite some time before Lululemon acknowledged it as a quality issue, after having put the blame on the customer and sweat pH level interacting with the dyes. Christine later admitted that the cause of the dye issue was Lululemon pushing the limits on colors that they knew would have color fast issues (neon dyes). Sounds like perhaps lululemon again pushed the limits on how thin they could make the fabrics before hitting ‘critical mass’ on customer complaints. As you know from my blog, I check fabric content on lululemon product religiously and refuse to purchase luon that has more than 47% polyester.  

The whole organization is obviously very devastated by what’s happened. And so everybody understands the sense of urgency of making sure that we alert the small noise and symptoms that we see, the little canary chirps, getting those to us as quickly as possible so that we can deploy the resources to avoid anything like this again. I feel so badly for the front end educators that are the most burdened by these issues (meanwhile, SEC filings show that on Tuesday the executive team increased their bonus structure from 150% to 200%!). I was told last year by a trusted source within that Lululemon corporate admitted to staff that their luon quality was unacceptable and that they were working on bringing back the ‘good luon’ from pre 2011. This new luon was expected for spring 2013. We know the luon was a known problem because they chose to add disclaimers about the sheerness of their pants on their website, and they remarketed Wunder Unders as ‘unders’. They admitted to their staff as long ago as last summer that their luon was a known problem!! I’m reading reports of educators being made to sample the luon garments and do the ‘bend over test’ in front of other staff members to determine sheerness. This is where the integrity of the executive team gets called into question. 

Analyst: I wanted to know if you can tell whether the quality issue is isolated to Luon. As you do these vendor checks, is there any other chatter that you’ve heard from the websites and blogs on any other particular products? And then I’ve looked at a lot of blogs and website reviews, and the chatter seems to be taking a very negative tone, particularly when people are returning product back to the stores. I’m wondering how you’re dealing with training the store ambassadors to handle this in a timely manner. 

Christine Day: We have put all of our educators on high alert, and making it really seamlessly easy for the guests as well as our (GEC). So communication and training calls with every store manager have already occured to make it seamless for guests to return the product that WE feel is affected. For right now, we primarily see this as an issue with luon. There are a couple of other fabrics that occasionally will have issues, but that’s fairly minor, and nothing that we see is as significant as what we’ve seen in the luon. 

And for the Christine Day sound bite of the day:

“The truth of the matter is the only way you can actually test for the issue is to put the pants on and bend over, Just putting the pants on themselves doesn’t solve the problem. It passed all of the basic metric tests and the hand-feel is relatively the same, so it was very difficult for the factories to isolate the issue, and it wasn’t until we got in the store and started putting it on people that we could actually see the issue.”

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