Will Lululemon’s New Lawsuit Make it a Downward-Facing Dog?

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Just when it seemed things couldn’t get much worse for Lululemon Athletica Inc. (NASDAQ:LULU), things got worse — because now Lulu’s is being sued.

The popular athletic and yoga gear retailer is having a rough go at it this year, starting in March, when the company was forced to recall 17 percent of its women’s yoga pants because the stretchy Luon fabric was too sheer. It was a loss for the brand: its see-through pants attracted significant unwanted attention and became the victim of many pun-loving headliners’ dreams. Though Lululemon eventually returned the pants to store shelves in June, the company still predicts profit will be reduced by up to $40 million this year.

To make matters even worse, not only did the company have to handle the dismissal of its chief product officer, Sheree Waterson, it also sustained another loss in CEO Christine Day, who voluntarily took her chaturanga elsewhere in mid-June.

Now the retailer is about to face another big blow. Houssam Alkhoury, a Lululemon shareholder with 7,500 shares, filed a lawsuit Tuesday charging that the Vancouver-based company “defrauded shareholders” by intentionally hiding the defects in its yoga pants and concealing talks about Day’s departure, resulting in shareholder losses. The lawsuit comes just three weeks after Day’s surprise exit, and now Alkhoury is arguing that it wasn’t such a surprise to certain people after all.

Day and company Chairman Dennis Wilson are the main subjects of the charge. Alkhoury contends that their cost-cutting efforts led to defects in the yoga pants, forcing the retailer to sell the otherwise pricey pants at a discounted value.

The lawsuit is accusing the executives of failing to disclose details about Day’s June 11 departure, which led to shares falling 17.5 percent. Reuters explains that Lululemon’s purposeful withholding of information caused the company’s share price to be artificially inflated and then suddenly drop, drawing significant losses for shareholders.

The lawsuit was filed in the U.S. District Court of Manhattan and seeks class-action status for shareholders between March 21 and June 10.

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