Breakout

The Naked Truth: Lululemon Pants Recall a Boon for Bulls

Jeff Macke
Breakout

On March 18, athletic apparel retailer Lululemon Athletica Inc. (LULU) announced that it would be recalling pants made out of its signature "Luon" fabric because of quality concerns. "It is always our first priority to protect the quality of our fabrics that keep our guests so loyal to our products," said CEO Christine Day in a press release. "We will accept nothing less than the very highest quality we are known for."

Despite Breakout's fawning coverage of Lululemon's damage control, shares got smacked 10% in the wake of the scandal. The number of shares sold short ramped more than one-fifth from March 15 to the end of the month. As happens so often, the herd got it wrong. Shares of LULU have since gone from the low $60s to nearly $80.

In the attached clip Brian Sozzi of Belus Capital Advisors says Day and her team scored points for the speed with which they disclosed the problem and the clarity they gave on the expected financial impact of the recall. As a result, a potentially disastrous flaw — see-through pants — quickly became a boon for the company's reputation.

Sozzi is still unconvinced over the longer term. From surfing the Lululemon fan pages, he's seeing complaints about a general decline in quality. Lululemon has beaten back the doubters for now, but more competition will eventually eat into its share. Sozzi likes what he sees from Nike (NKE) and Under Armour (UA), and he doesn't think Lululemon can hold back such competition forever.

Of course, bears have been saying the same thing for years. At least for now the competitors are going to have to be content with the view as Lululemon runs away in the distance.

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