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Product Recall to Hurt Lululemon's 1Q13

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Shares of the Canada-based yoga-wear retailer, Lululemon Athletica Inc. (LULU - Free Report) dropped 3.8% yesterday after the company announced that it will fail to meet the sales forecast in the first quarter of fiscal 2013, due to a product recall. The stock closed at $65.90 on Monday.

Lululemon revealed that owing to some quality issues in materials used, it is pulling back its black Luon pants and crops from its stores and website. The company noticed that the products, which were shipped to its stores on Mar 1 and thereafter, had some wardrobe malfunction.

Lululemon, which is known for its quality standards, has therefore announced that the customers, who have purchased Luon products either from its stores or online after Mar 1, may get a replace or full refund. Luon products account for approximately 17% of all women’s bottoms available at the company’s outlets.

Management stated that the product recall would significantly hurt its sales in the first-quarter fiscal 2013 financial results. Consequently, Lululemon lowered its sales forecast for the quarter. The company now expects its comparable-store sales (comps) to increase between 5% and 8%, down from previous projection of 11%.

As a result, Lululemon also lowered its sales forecast range to $333–$343 million from its earlier projected range of $350–$355 million. However, the company is yet to determine the impact of this product recall on its first-quarter and fiscal 2013 bottom line.

Lululemon, which competes with New York & Co. (NWY - Free Report) , Abercrombie & Fitch Co. (ANF - Free Report) and Ascena Retail Group Inc. (ASNA - Free Report) , is scheduled to report its fourth-quarter and fiscal 2012 financial results on Mar 21. On the back of high-single-digit sales growth expectation at comparable stores, the company anticipates its revenue for the fourth quarter to be at the higher-end of previously-guided range of $475–$480 million.

On these assumptions, Lululemon expects to post earnings of 74 cents per share in the to-be-reported quarter, which is in line with the Zacks Consensus Estimate.

We believe that Lululemon has the ability to drive impressive top and bottom-line growths by focusing on e-Commerce retailing channel, international expansion and investment in innovating newer product categories. Further, the company is well positioned to attract new consumers due to a shift in focus of the consumers toward a healthy lifestyle.

However, we remain slightly cautious over the stock due to sluggish comps growth and intense competition. Therefore, this athletic clothing maker currently holds a Zacks Rank #3 (Hold).

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