Since 2009, active wear brand Lululemon Athletica has seen profits soar, regularly increasing its guidance after better than expected performances. But, is the recall of its black Luon pants a sign that the brand is growing too quickly?

Lululemon has warned that it may lose sales of around US$20m during its first-quarter after issues with a key fabric used in its leggings forced it to withdraw some of the products.

The retailer said certain shipments of its black Luon pants, arriving in store from 1 March, did not meet its technical specifications and were sheerer-than-expected.

Consumer proposition
For many consumers, their attachment to Lululemon borders on the devotional, with the company creating a full lifestyle offer - including yoga classes in store to an annual half marathon and yoga weekend in Vancouver each year.

This consumer buy-in is only enhanced by how the brand focuses on limiting the availability of each product.

Describing its strategy to analysts alongside the group's third quarter results, CEO, director and president Christine Day said: "If you don't buy pretty quickly, then you're not going to get them, and that's actually by design. That's not an inventory level issue.

"That's a strategy, as part of our scarcity, so that we aren't putting everybody in the same outfit, that there is a limited availability of certain styles and colours. And that's our model. So those aren't inventory challenges. That's the model at work and working beautifully to sell the majority of our products at full price."

Creating functional products under a fast fashion model is a recipe for disaster. Fashion development cycles do not allow time to test fabric over long use, which doesn't matter when a dress is only going to be worn a few times, but when fashion meets serious, possibly twice daily, activity, it's potentially lethal. 

Indeed, when speaking about the challenges faced around testing the brand's clothing for these issues, Day told analysts yesterday (21 March): "The truth of the matter is the only way that you can actually test for the issue is to put the pants on and bend over. Just putting the pants on themselves doesn't solve the problem.

"So it passed all of the basic metric tests, and the hand feel is relatively the same. So it was very difficult for the factories to isolate the issue, and it wasn't until we got in a store and started putting it on people that we could actually see the issue."

Quality issues
These ongoing issues around quality assurance is leading to some consumers questioning their faith in the brand.

While this is the largest quality issue the brand has faced this year, it is certainly not the first. Credit Suisse analyst Christian Buss highlighted how certain swim colours for spring 2012 were shipped with sheerness problems, while a line of light coloured pants now on sale have sheerness issues and are being offered with a disclaimer: "You may experience sheerness with some of our bright coloured bottoms because of the lightweight nature of the fabric. We recommend you do a couple of Down Dogs in your bright-coloured bottoms to ensure you're happy with the fit and coverage."

The company also faced dye bleeding issues in some of its products during the spring. Explaining the dye issue, Day said: "Primarily for us, it was the bright neons, which are very difficult to put on fabric, and we pushed the colour limits pretty intently. So we did have bleeding with Paris Pink and a couple of small isolated issues, which were very hard for us to track down, in a couple of other colours that were also bright neons that came in the second quarter."

Bloggers have also highlighted further issues with its offer, with one suggesting that the retailer has changed its gusset design and used thinner Luon fabric, which has led to increased "camel toe" as well as experiencing increasing issues with poor construction.

Meanwhile, the brand's Facebook page is littered with complaints over the Canadian brand's product quality and the fact that much of its range is made in Asia.

Limited supply base
In the risks section of its annual report, Lululemon said that in fiscal 2012, around 60% of its products were produced by its top five manufacturing suppliers, and its Luon fabric is supplied using a single manufacturer, Taiwan-based Eclat.

Additionally, the retailer said: "We have no long term contracts with our suppliers or manufacturing sources, and we compete with other companies for fabrics, raw materials, production and import quota capacity."

While the retailer has a fairly limited supply base, one industry executive, who declined to be named, suggested that semi-monopoly suppliers "are close to inevitable in a specialist business trying to develop innovative products".

The source added: "If 36% of its buying is with Eclat, as its latest filing implies, the likelihood is that it is buying fabric and lending it to garment factories, rather than requiring factories to buy specific fabric from specific mills. This makes its supply base look more concentrated than it probably is."

Buss added that the miss step highlights the brand's "prudent efforts to diversify [its] textile offerings".

He said that while the recall of 17% of bottoms is an "obvious negative, we believe recent efforts to shift the product mix away from the company's signature Luon fabric have helped minimize the damage".

Buss said that while the ten types of Luon fabric offered are sole sourced from Taiwanese manufacturer Eclat Textile, the brand has also introduced high wicking Luxtreme, Tech Fleece, underwear fabric Transluxent, Swift, Silverescent, bamboo rayon derivative Boolux, pima cotton, and Tencel fabrics over the "last several" years. "This allows Lululemon to be less reliant on a single manufacturer while maintaining its emphasis on high quality fabrics as a competitive differentiator," he added.

Lululemon plans to diversify its supplier base further, with the company set to have "two additional sources ready for manufacturing our key fabrics by the fall," according to Day. 

International growth
Lululemon's international expansion is set to continue, with plans to expand its foothold in London and Hong Kong, while introducing its produts to a variety of markets in Europe and Asia through strategic sales, showrooms and e-commerce. 

This year, it plans to open 10-15 showrooms in international markets and is seeking its first store site in Hong Kong.