Founder’s Exit Makes Lululemon Stock a Better Buy (LULU)

Shares in Lululemon Athletica (NASDAQ:LULU) sold off Thursday on the news that founder Chip Wilson is seeking to sell his entire $1.3 billion stake in the active apparel maker.

Founder's Exit Makes Lululemon Stock a Better Buy (LULU)But LULU stock will bounce back before too long. Wilson was an albatross.

Bitter fighting between a board of directors and a major shareholder is never good for rank-and-file investors — especially when the shareholder is the company’s founder — and Wilson and the board have been going at it for months.

Wilson was highly critical over the company’s strategy, as well as other matters. Earlier this year, the LULU board rejected Wilson’s call for reforms to its corporate governance — a call that dates back to 2014. Wilson resigned from the board of directors after coming to a settlement, and his relationship with LULU has looked precarious ever since.

The stake sale will allow Wilson to plow money into his new retail project, a chain of apparel stores call Kit and Ace. The board, meanwhile, will be free of a distraction as LULU stock appears to have finally shrugged off the effects of a costly and embarrassing recall a couple of years ago.

As we noted after LULU earnings, the way the company is performing it won’t be too long before shares reclaim their all-time high. After all, LULU served up the market’s favorite earnings meal: It beat on revenue and earnings, and it hiked its profit forecast.

LULU Back on Track

For a long time, LULU was having trouble with increased — and cheaper — competition, as well as fashion missteps. As much as basic styles work for people who wear Lululemon while exercising, they’re not so successful as everyday attire. LULU responded with a selection of fashions that are resonating with shoppers.

Indeed, the quarter was good enough that the better-than-expected Lululemon earnings might just be the catalyst that launches LULU on a path toward record highs. LULU stock was up 20% — and that was before the Wilson news landed.

Even after Thursday’s light selloff, it’s still beating the broader market by about 15 percentage points.

But Lululemon has a way to go before it reclaims all the ground lost to the recall of 2013. The scandal sparked a yearlong selloff, and LULU stock is still shy of its record levels of two years ago.

Wilson stake sale should help it get there once the initial shock wears off. Yes, LULU stock fell sharply on the news, but that’s what happens when you say you’re going to add $1.3 billion in shares to the active market for them.

Eventually the market will realize that the founder’s exit will only help the company concentrate on grabbing back market share and expanding without Wilson’s interference.

As Sterne Agee analyst Sam Poser wrote in a note to clients, “The divestiture finally eliminates Mr. Wilson’s influence over the company (this is very good news.)”

The analyst told clients that the selloff in LULU stock is a buying opportunity and he’s probably right. If you were bullish on LULU stock before the Wilson news, the outlook is even better now — and the shares are on sale.

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

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