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Is Lululemon Really Claiming No Fault?

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Investors don’t like to hear the word “recall,” followed by the name of a company in which they own stock. In the case of Lululemon (NASDAQ: LULU) the recall of its “unintentionally see-through” black yoga pants is especially painful.

In a statement Monday, the company said, "The ingredients, weight and longevity qualities of the pants remain the same, but the coverage does not, resulting in a level of sheerness in some of our women's black Luon bottoms that falls short of our very high standards."

CNN Money reported that the company says the recall, which amounts to 17 percent of all women's pants sold in its stores, will cause shortages that will have a significant impact on the company’s financial results.

Prior to the recall, the company was on track for an 11 percent increase in sales at stores that had been open at least a year. Revenue in Q1 ending in April was expected to come in between $350 million to $355 million. Now the company expects no more than a five percent to eight percent sales gain and revenue as low as $333 million.

Shares of the Vancouver, B.C. - based company tumbled 6.8 percent in premarket trading. This follows a 3.8 percent drop in the stock in trading Monday ahead of the company's announcement of the recall.

Meanwhile, according to the Wall Street Journal, the chief financial officer of Eclat Textile Co., a Taiwanese supplier to Lululemon says their clothes were not "problematic."

The remarks came after Lululemon blamed the supplier for the “see-through” problem.

"All shipments to Lululemon went through a certification process which Lululemon had approved. The pants were manufactured according to the requirements set out in the contract with Lululemon," Eclat chief financial officer Roger Lo said.

The WSJ said Mr. Lo confirmed, Tuesday that the company supplies Luon pants to Lululemon. He insisted that the manufacturing process complies with Lululemon's requirements.

Lo said Lululemon hasn't contacted him or the company since the news broke, so he wasn't able to tell what might have gone wrong. He was unsure which factories produced the yoga pants. Neither was he sure where the materials came from.

Eclat, established and based in Taipei since 1977, is a contract manufacturer of functional sportswear and stretched knitwear, designing and producing for brands such as Columbia (NASDAQ: COLM), Asics and Lululemon.

Stifel Nicolaus reduced its price target on Lululemon to $75 from $83, noting that this is the company's second major quality issue in a year. While the firm is "highly concerned," it still maintains a Buy rating on the stock.

Sterne Agee downgraded the stock from Buy to Neutral. Sterne Agee analyst Sam Poser said, “We are lowering our estimates in 1Q13 and 2Q13 from $0.43 & $0.44 to $0.40 & $0.42.”

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