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Lululemon Athletica Supply Chain Snafu- Recovery Underway

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In late March, Supply Chain Matters called our reader’s attention to a rather visible and potentially expensive supply chain related snafu involving Canada based yoga apparel retailer Lululemon Athletica.  This retailer was forced to both recall and stop selling its most popular line of yoga pants after discovering that the “sheerness’ of the fabric allowed too much to be seen underneath.  The CEO had to publically apologize to customers for the problem. The affected product, which sold for a premium price, accounted for nearly 17 percent of all women’s pants sold by the company. This glitch involved a proprietary signature fabric which is termed Luon which apparently was the center of the quality problem.

This week, roughly three months after this highly visible incident, the company appears to have overcome its crisis, but the fallout has been some leadership changes. Yesterday, Lululemon reported fiscal first quarter 2013 financial results that included a 21 percent increase in revenues but a 10 percent decline income from operations. In the earnings briefing, CEO Christine Day described the recent quarter as “one of the most important in the company’s history.”  To Lululemon’s credit, supplies of its Black Luon yoga pants are beginning to be made available but full inventory recovery is not expected until end of the company’s fiscal second quarter.

Day further announced that she has decided to step-down as CEO of the company after over five and one-half years because of personal reasons. Day will stay-on until her successor is in-place. There were also previous reports that a high level product manager had been dismissed shortly after the incident.

During the earnings briefing, executives indicated a new awareness as to the importance of end-to-end supply chain quality control and the running of a tight sourcing operation.  CEO Day described that the company has to become an in-depth expert on all of its technical fabric specifications, not relying on suppliers to be the total experts. More tests have been added at the raw material stage and tolerances have been tightened with producing factories. Investments described as $4.5 million are now being made in these areas including the hiring of raw material teams and separate executives to lead both product design and merchandising and supply chain functions. This retailer also described a roadmap involving heavy IT investments that began in 2012 and will continue in the coming months.

It was disclosed that the product recall contributed to a 510 basis point decrease in gross margin due to a $17.5 million write-off of unsellable inventory. Executives stressed that the company will continue to work with a relatively small group of suppliers.  Executives also describe a recent labor strike involving a Cambodia based supplier, but stressed that this supplier has been a leader in raising worker wages and benefits.

A more important learning for this retailer has been the loyalty of customers to the brand, in spite of the snafu. Loyal customers apparently applauded the decision to remove poor quality and were willing to wait for the replacement inventory.  Executives described a much higher level of web-based inquiry activity by customers, apparently checking status of the quality issue, by a frustration that heightened web activity did not lead to significant web-based sales increases. However, a Wall Street Journal opinion column points out that market competition, specifically the Athleta chain of Gap Inc., is similar in look and feel and undercutting Lululemon on price.

Investors did not seem pleased with the latest earnings and announcements.  As we pen this commentary, the Lululemon stock is tracking down by over 16 percent, a significant negative response. The stock had been trading at a level of over 40 times earnings of-late.

More work and additional supply chain leadership efforts remain for this unique retailer but for the time being, brand loyalty and reputation seem to have overcome severe financial fallout from the supply chain snafu. Investors however, are reserving judgement.

Bob Ferrari

 

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