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Would a Wilson-Less Lululemon Be Good for Shareholders?

Lululemon's founder isn't exactly fostering team togetherness, but he's not the only thing holding LULU down


Change appears to be afoot at embattled yoga-apparel maker Lululemon Athletica (LULU). Dennis “Chip” Wilson, the company’s founder, is reportedly exploring various options surrounding the company’s future, including a scenario in which he sells his 28% stake in LULU stock and relinquishes his influence, according to The Wall Street Journal.

lululemon lulu stockShares advanced 2.5% on Monday following the reports, a welcome sign for LULU stock holders who have taken it on the chin in the past year.

So would a Wilson-less Lululemon be just what shares need to finally emerge from the doldrums?

Wilson has been a controversial figure for Lululemon. Blaming women’s body types for yoga pants that don’t fit during a Bloomberg interview in November was a mistake, one that both Wilson and shareholders paid for. While not the only cause, shares have tanked 65% since Wilson’s views came to light, and Wilson relinquished his role as chairman of the board to become a member of the board in the weeks that followed.

However, that hasn’t stopped him from asserting his views on the future direction of the company, as at the company’s recent shareholder meeting he voted against two board members, including his replacement as chairman of the board (both of whom were approved by the majority).

Change Is in the Air

If a house divided against itself can’t stand, LULU stock doesn’t have a prayer. But change is in the air, evidenced by the fact that Wilson over the weekend reportedly brought in a third party, Goldman Sachs (GS), to explore Lululemon’s options, according to the Journal report.

Once an investment bank is engaged, it’s oftenonly a matter of time before a shift occurs.

A Wilson exit isn’t the only possible scenario; a strategic buyer — Nike (NKE) Under Armour (UA) or Gap (GPS) for instance — could emerge, or a Wilson-led private equity consortium could take over. Still, investors should consider a future sans Wilson.

To be fair, Wilson hasn’t been Lulu’s only problem over the past year. Lululemon suffered from the infamous transparent Luon pants recall exacerbated by a lack of leadership that failed to restore a tarnished Lululemon brand in the eyes of the public. Since then, the Luon problem has been rectified, and then-CEO Christine Day has since been replaced. The only wild card that hasn’t been removed is Wilson, and in the meantime shares have continued their decent, down 33% in the past 52 weeks.

Perhaps the one thing that could turn around the ship would be if Wilson were to sell his stake and abandon Lululemon.

But if that’s the case, investors should be careful what they wish for.

There is no question the Lulu brand has been wounded. The problem is Wilson and the board have failed to agree on the best way to restore Lulu to its glory. Wilson is touting a long-term solution, while the board seems to have tunnel vision, evidenced by its decision to implement a $450 million share-buyback program amid waning same-store sales and revenue expectations.

Sure, buybacks naturally will drive earnings per share higher at first (fewer shares mean an inflated EPS), but how long can results be artificially propped up?

Is Splitting Up the Best Thing for LULU Stock Holders?

If Wilson and Lululemon part ways, it could help LULU stock in the short term, but it might not be the best long-term solution for the business.

As the drama continues to unfold, however, you really can’t argue with the relative value that LULU shares offer, trading at a trailing P/E of 24 and a forward P/E of about 23, vs. another athletic apparel pure-play, Under Armour, which trades at trailing and forward P/E ratios of 75 and 63, respectively.

The former Wall Street darling has a product that has resonated with consumers before, and Lulu is targeting an international expansion push beyond its North American and Australian presence. The company in its latest 10-K filing said:

“Beyond North America, we intend to expand our global presence as part of our long-term business strategy. We believe that partnering with companies and individuals with significant experience and proven success in the target country is to our advantage.”

The question for investors is whether any gains will be short-lived or sustainable, and Wilson could be the deciding factor.

Regardless, it might be time for investors to stop punishing Lulu for the past and start valuing the stock based on its future – with or without Wilson.

As of this writing, Gerelyn Terzo did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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