Yoga-inspired athletic apparel company Lululemon Athletica Inc. says its year-long battle with bad publicity linked to slowing growth and a messy product recall did not reflect intent to defraud shareholders.
In a filing in the U.S. District Court in Manhattan, the Canadian retailer said it quickly addressed quality control problems, and updated investors in about the impact. It admits that comments by founder and Chairman Dennis “Chip” Wilson that some women’s body shapes “just actually don’t work” with Lululemon yoga pants created negative company press.
Additionally, shareholders accused Lululemon of hiding defects in its black luon pants, which were recalled; concealing its inability to address quality shortfalls; using deep discounting to boost market share, and concealing plans to replace Christine Day as CEO.
“While all of this makes for interesting reading,” the company said in a statement, “it does not constitute securities fraud.”
Now, Lululemon is seeking to dismiss an amended lawsuit accusing it of misleading shareholders from September 7, 2012 to 10, 2014- just before shares of the company fell to a two-year low.
Just last month Day was, in fact, replaced as CEO by former TOMS Shoes president Laurent Potdevin. In addition, Wilson is stepping down this year as non-executive chairman. Wilson said he had last held a management role at Lululemon in January 2012, and that allegations that he “dipped in and out of daily affairs” did not show he knew about any fraud.
Admitting 2013 was a tough year after the second low earnings forecast, CFO John Currie called this “a real wake-up call.”
While we believe much of 2013 for Lululemon can be best described as self-inflicted pain, it is still likely to outperform the vast majority of retail in 2013.
Sharon Zackfia, Partner and Group Head-Consumer at William Blair & Company, L.L.C, said, “There will be a 4 percent brick-and-mortar comp gain and an approximate 10 percent comp gain including e-commerce. With some encouraging early data points on customer reception of spring product, we see the potential for comps to begin improving as early as the first quarter and view the stock as a compelling risk/reward opportunity from current levels of 22 times our 2014 estimate.”
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