Chip Wilson Sheds Lululemon Stock: Good News or Bad?

He's not giving up, but Wilson seems to be playing nice for now

   
Chip Wilson Sheds Lululemon Stock: Good News or Bad?

Chip Wilson threw in the towel Thursday. The Lululemon (LULU) founder sold half of his 28% ownership stake to Advent International, the Boston-based private equity firm that first invested in Lululemon stock back in 2005. Wilson’s move signals a truce between LULU and its controversial founder.

lululemon 185 Chip Wilson Sheds Lululemon Stock: Good News or Bad?So, what exactly does yesterday’s news mean for LULU and Lululemon stock? Is it good news, bad news or much ado about nothing?

Good News for Lululemon Stock

Chip Wilson’s threat to launch a proxy fight was a distraction that LULU didn’t need. CEO Laurent Potdevin has been on the job for seven months now, working to revitalize a brand that took a huge hit in 2013. The former head of Tom’s Shoes, and before that, Burton Snowboards, is trying to build an organization that’s better prepared for its next stage of growth.

As the saying goes, you only get one chance to make a first impression. Wilson’s interference took the focus away from the task at hand for Potdevin, which is to regain the trust of its loyal following and owners of Lululemon stock. Fighting a proxy battle does little to engender that.

Wilson receives $845 million for half his 40.2 million shares, which works out to $42 per share. While that’s well below $76 — its 52-week high from October 2013, Wilson obviously feels a bird in the hand is worth two in the bush when it comes to Lululemon stock. While this agreement means he can’t fight a proxy battle or support a hostile takeover until 2016, he now has the support of his former partners who did very well on their initial investment. Perhaps they feel it’s time to return the favor.

The Globe and Mail’s Marina Strauss points out a couple of positives I hadn’t really considered.

First — and this comes second-hand from Jim Danahey, CEO of CustomerLAB, a Toronto-based productivity consultant — is that the sale agreement forces Laurent Potdevin “to sink or swim.” He essentially has until the annual meeting in 2016 to fix the business and get it humming again with gross margins into the mid 60s and Lululemon stock into the $70s. If not, he’s gone and Advent goes to work.

The second point is that the agreement calls for the company to hire an independent expert to carry out a 90-day evaluation of the board’s policies and procedures. With one of the two Advent representatives becoming co-chairman, the board is being forced to consider the interests of the new board members, which are different from the short-term mindset Wilson feels the current board is following

Wilson selling Lululemon stock should be viewed as a good thing because it enables him to carry out a toned-down fight in the boardroom rather than a messy battle in the press. With an ally alongside (Advent) it will be that much easier.

Bad News for Lululemon Stock

If you’re not a Chip Wilson fan because of his outrageous statements about women’s bodies, etc., then you probably hoped he would sell his entire stake and quietly disappear. Unfortunately for you, despite selling half his shares, he’s not going anywhere. Nor is he getting involved with Kit and Ace, his wife and son’s new street-wear brand.

Some believe that Wilson created a cult-like business environment that Christine Day was unable to squash. While she brought a level of professionalism to LULU, it was Wilson’s passion that carried the day. That’s a good thing when businesses are just starting out … but when they have 263 stores in five countries and expansion plans that include more than 100 stores across North America, Europe and Asia, it helps to have people who aren’t prone to speaking first and thinking later.

As long as Chip Wilson remains in the game, it’s hard to imagine Laurent Potdevin getting much room to maneuver. Fortunately, Potdevin has worked for two founder-led companies in the past and understands the nature of the beast. Only, in this situation, we’re talking about a public company, which makes matters much more delicate.

Bottom Line for Lululemon Stock

Don’t misinterpret yesterday’s news as much ado about nothing — despite the fact nothing has really changed at the company. Potdevin is still CEO and Wilson is still the overly protective father figure.

On balance, I view this move as good news for Lululemon stock. Potdevin has the experience to turn LULU around; the share sale provides investors with a little more assurance that Wilson is going to play nice in the sandbox. Hopefully, that translates into a crisis-free remainder of the year.

As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2014/08/lululemon-lulu-stock/.

©2014 InvestorPlace Media, LLC

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