Rumors abound that Under Armour Inc (UA) or Nike Inc (NKE) or both could take a run at acquiring Lululemon Athletica inc. (LULU). The company was once the greatest name in the apparel industry’s move to athleisure wear: A combination of workout and everyday walking around clothes. In its heyday back in 2013, LULU stock blew through $80 on the strength of its expansion plans; former CEO Christine Day could do no wrong.
Fast-forward to 2016.
Although Day is long gone, the company continues to attract attention from its bigger rivals. However, some experts, suggest these rumors are just that — speculation and innuendo. In a note to clients late November, Sterne Agee CRT analyst Sam Poser commented:
“While we do not dismiss the chatter outright, we believe both scenarios are very unlikely to occur … Both NKE & UA are focused on building their own respective brand. Adding another brand to the mix would prove a distraction. The differences between the primary consumer of each brand are subtle but real. An acquisition of course, would be good for LULU shareholders, but would prove to be bad for shareholders of NKE or UA.”
But before you pass on LULU stock as a good takeover target, consider that there is another company that Lululemon could turn to in order to juice its stock. One that doesn’t have the same financial investment in a single brand, but is always looking to grow its stable.
I’m talking about VF Corp (VFC): The North Carolina-based apparel conglomerate known for brands such as The North Face, Vans, Timberland and many more. As a part of VF’s biggest division — outdoor and action sports — this trio of brands, along with some others, generated an operating profit of $1.3 billion in fiscal 2015 on $7.4 billion in revenue. Not only is this VF’s biggest segment, it’s also its best performing, accounting for roughly 60% of the company’s overall revenue and 62% of its operating profit.
On a currency neutral basis, Outdoor and Action Sports saw year-over-year revenues grow by 9%, all while mustering a 7% YOY increase in operating profits in 2015. The next closest segment in terms of currency neutral growth was its jeans wear division, which includes Lee and Wrangler. Jeanswear saw revenue and operating profit growth YOY of 4% and 7%, respectively. Nothing else at VF comes close in terms of size or significance.
It’s been close to five years since VF bought Timberland for $2 billion, its biggest acquisition ever. The company hasn’t done anything since and it’s now time to get back in the M&A waters. Lululemon stock would be the perfect splash — here’s why.
LULU Stock Is a Win for VF Corp
Recently, in an interview with TheStreet‘s Brian Pozzi this February, VF CEO Eric Wiseman admitted that the company was on the prowl for another Timberland-like acquisition:
“When we bought Timberland, we took ourselves out of the acquisition market. We had just spent $2 billion so we wanted to make sure we created the value we promised our investors we would create … [Since Timberland] The valuations in the space have come down for everyone, meaning some of the targets that we were only not pursuing because of price we can now have talks with.”
Lululemon could be the perfect candidate — a win/win for both companies.
How’s that you ask?
Part of its action and sports stable is Lucy, a west coast company that competes with LULU; VF acquired Lucy in 2007 for $110 million. At the time, it had an annual revenue of $57 million. Today, VF operates 50 Lucy stores across the U.S. While it doesn’t break out Lucy’s annual revenues, I’d be shocked if it did more than $200 million. LULU expects to do $2.03 billion in fiscal 2015.
If VF wants to get serious about the women’s segment of the athleisure wear market, buying the leader is the only way to go.
While Nike and Under Armour might not bite on LULU stock, VF should. And if LULU is smart, CEO Laurent Potdevin has already made that call.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
