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Lululemon Plagued By Supply Chain Problems; Shares Down 16%

Once a rising star among athletic wear retailers, Lululemon has been plagued by financial setbacks, some of them directly related to dysfunction along its supply chain.  A spokesperson for the company delivered preemptive bad news that sales for the quarter ending November 2 will likely disappoint already modest expectations.

The warning rattled investors, sending Lululemon’s shares spiraling down more than 16 percent on January 13 to $49.72. John Currie, Lululemon’s chef financial officer, said that while the company performed according to expectations through the end of December, it experienced  a “meaningful” drop in sales in January.

Of course, Lululemon is one among many retailers to falter recently, swimming against the current of general economic malaise and suffering from a financially pinched consumer public. However, what makes Lululemon’s travails so unique is that the worst of them stem directly from problems embedded within their supply chain. Last Spring, the company was forced to recall its best-selling black “luon” yoga pant style after it was discovered that the stretch fabric used to make it was too sheer.. The luon pant shortage certainly left its mark; inventory at the end of that quarter equaled $163 million, in comparison to the previous year’s $125.4 million. Chief Product Officer Sheree Waterson was terminated because of the snafu. Then CEO Christine Day unceremoniously resigned.

In response to a manufacturing problem, Lululemon overcommitted itself to mending its broken supply chain and increasing the heavily criticized quality of its offerings. However, progress on this front came at the expense of innovation as Lululemon’s designers neglected to introduce new products, lending itself to stale store inventory.

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Janet Kloppenburg, founder of retail consultancy JJK Research, said, “They spent a lot of time trying to get back in stock on Luon. As a result, they ordered the fashion product later than they should have and are suffering from late deliveries.”

To only worsen matters, Lululemon’s manufacturing missteps were closely followed by a series of public relations debacles. As the retailer’s iconic yoga pants continued to attract criticism for inferior quality, company founder “Chip” Wilson suggested the construction of the pants was acceptable, and that it was customers’ bodies that were to blame. He infamously remarked,  “Quite frankly some women’s bodies just actually don’t work for it. It’s really about the rubbing through the thighs, how much pressure is there.” Unsurprisingly, a maelstrom of negative press ensued. As a result, Wilson will relinquish his position as non-executive chairman of the board.

The  financial ramifications of Lululemon’s floundering has been considerable. The yoga-retailer now expects to register earnings of 71 cents to 73 cents per share in the fourth quarter, much lower than the previously predicted 78 cents to 80 cents. Store revenue could be as low as $513 million, a meager sum compared to company’s projection of $540 million. This underperformance is a sharp departure from its once impressive success: from 2008 to February 2013, Lululemon’a revenue soared to $1.4 billion from $270 million.

Many experts are citing Lululemon as an instructive example of how garment sourcing, once neglected as peripheral to a brand’s success, has become a key driver of profitability.