The yoga world was rocked to its meticulously-toned core yesterday, when Lululemon announced it was pulling some of its signature black Luon pants from shelves, after a manufacturing foul-up left them overly see-through. This "sheerness problem," as the Wall Street Journal artfully deemed it, might affect one out of every six pairs currently in stock. As a result, the company says its customers should expect a shortage.
The reaction from investors has been decidedly un-yogi-like -- a swift and harsh sell-off that's knocked about 5 percent off the Canadian company's share price. Now, this might just be a temporary blip, as investors adjust their expectations for this quarter's profits. But it's tempting to wonder whether the market's anxiety is a sign of deeper problems for the trendiest name in athletic wear.
As you might have noticed from the parade of multicolored mats at your local gym, the U.S. has been going through a bit of a yoga boom in the last few years. The Analysts at IBISWorld estimate it's one of the top ten fastest growing American industries. And perhaps nobody has benefited from that more than Lululemon, which has seen its sales nearly quadruple since 2008, and its stock price grow about 740 percent in less than three years. It's tough to earn a living teaching yoga full-time, but $98 Astro Pants are the modern version of the old adage about Levis: Nobody made any money off California's 1840s gold rush except the stores selling blue jeans and pick axes to the miners.
Investors have been plowing their money into Lululemon's stock under the assumption that there was still lots of room to grow. Its share price is trading at just under 40 times its earnings. Apple's, by comparison, trades at about 10X. That's a sign investors are betting on an extremely bright future, not what the company's quarterly earnings look like today, or even three months down the line.
Even before this week's sell off, though, the stock had already been declining over the quarter, as investors began to wonder whether the company could keep adding new customers at such a rapid pace. As Meg Miller of Reuters Breakingviews pointed out back in June, yoga's exploding popularity has attracted competition from companies like Gap and Victoria's Secret, who are selling their lines for less.
Before Lululemon, nobody was really marketing high-end yoga wear. Now that the company has proven the concept, others want a cut. It's the curse faced by many lifestyle brands -- think of Apple's recent trouble fending off Samsung -- and Lululemon's ability to thrive in the coming years will depend on somehow convincing customers that its products really are worth the premium. And the first step is to make sure people can actually wear your pants with peace of mind while they're doing handstands in public.