A U.S. investor has launched a class action lawsuit alleging Lululemon Athletica Inc. failed to disclose that quality defects in its Luon yoga pants, which were later recalled for being too sheer, were the result in part of cost cutting.
Plaintiff Houssam Alkhoury accused the company of making misleading statements and omissions that caused its stock price to become artificially inflated.
The lawsuit also alleges the company was selling its yoga pants at a discounted price to hold onto market share, and that there were ongoing discussions about the departure of CEO Christine Day, who announced plans in June to step down once a successor is named.
The allegations have not been proven in court.
Lululemon responded by saying in a statement, "We have reviewed the complaint and believe it is without merit. We plan to vigorously defend the claims."
Shares in athletic clothing retailer fell sharply after Day announced her pending departure on June 10.
The lawsuit, which was filed in a New York district court, is on behalf of all buyers of Lululemon shares between March 21 and June 10.
It is the second lawsuit that has been filed against Lululemon after the recall of its black Luon pants.
In May, the Hallandale Beach Police Officers and Firefighters' Personnel Retirement Fund sued Lululemon over its decision to increase potential bonuses for executives prior to announcing the recall.
Lululemon began pulling its black Luon pants, which represented 17 per cent of its woman's pants inventory, off shelves on March 18. Since then, Lululemon has said that the fabric used in the pants did not meet its standards.
Chief product officer Sheree Waterson also left the company in April.
The company has said it is testing and assessing all Luon products to ensure they meet "revised specifications for modulus (stretch), weight and tolerances."
It has also stationed employees at factories to ensure that the new tests and standards are being met.