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Lululemon drops; downgraded after recent comments

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November 14, 2013 11:49 AM EST | AP

NEW YORK (AP) — Shares of Lululemon Athletica fell Thursday after an analyst downgraded the yoga-inspired clothing company, citing recent comments from its chairman and founder along with quality issues.

THE SPARK: Sam Poser of Sterne, Agee & Leach lowered Lululemon Athletica Inc. to "Underperform" from "Neutral." The analyst set a $56 price target.

THE BACKGROUND: Lululemon has received continued complaints on its Facebook page and website about its yoga pants being too sheer. Customers have also voiced concern about pants pilling after a few months of wear — or even just a few uses — and about holes and seams coming apart.

In the spring, the Canadian company pulled its popular yoga pants from its shelves because they were too sheer. It blamed those problems on a style change and production issues. New pants have since hit stores, but the sheerness complaints have continued, in addition to the new gripes about wear and tear.

THE ANALYSIS: Poser said that recent comments from Chairman Chip Wilson are also not sitting well with customers. Wilson said in a television interview that some women's bodies don't work for the pants and that thigh rubbing over time will cause the pilling and poor performance of the pants.

Poser said that Wilson did seem to apologize to Lululemon's workers for the criticism his comments received, but didn't retract his original statements.

"Based on our checks and retail experience, we believe that the core Lululemon customer has been alienated and will begin to look for yoga and active-wear pants from the likes of Nike, Under Armour, Athleta and numerous other brands," the analyst wrote.

Poser believes that Wilson's comments, the quality issues and ongoing search for a new CEO "will likely continue to alienate existing customers, making it tough to attract new customers."

"We have thought Lululemon has been walking a tightrope for months, and now we believe it will fall off," he said.

Kimberly Greenberger of Morgan Stanley said that a survey by her firm shows that Lululemon's brand has gained popularity among women over the past year. However, the survey indicated the company is losing some of its reputation for quality. Greenberger said that the quality issues could give businesses like Nike, Under Armour and Victoria's Secret room to grab some of Lululemon's customers.

"All three are increasing focus on Lululemon's categories and bring tougher competition than Lululemon is used to," she said.

Greenberger kept an "Equal-weight" rating.

Lululemon Athletica Inc. does not comment on analyst reports.

SHARE ACTION: Down $3.07, or 4.5 percent, to $65.91 in midday trading. The stock closed Wednesday down 10 percent since the start of the year.