When there is a fight over control of a public company, one would hope the winner would drive change and, with it, raise the stock price. That has not worked at Lululemon. The real problem is that its business model is fundamentally flawed.
As the founder of Lululemon and the current management fight over control, the stock is down 42% so far this year and over 62% over the last year.
Chip Wilson, founder and largest shareholder, has pressed for change at Lululemon Athletica Inc. (NASDAQ: LULU | LULU Price Prediction). He recently sent a letter to other shareholders, which said, “Your investment in Lululemon Athletica Inc. is in trouble. The current board of directors of Lululemon simply does not understand this business and, as a result, shareholders have suffered.” He has said he wants three new directors on the board.
Fund management firm Elliott Investment Management has also taken a position, presumably because they expect a change in the company’s direction. Wilson owns 9%.
Lululemon has taken its own public position. It said it would not support Wilson’s efforts to change the board, and added that shareholders should not “endorse his misguided perspectives.”
There have been “settlement” talks between Wilson and the company. They have fallen apart, so the winner will be determined in a proxy battle. From the perspective of investors, “what barks like a dog and acts like a dog, is a dog.”
In the most recent quarter, revenue was up only 1% to $3.6 billion. EPS fell to $5.01 from $6.15 in the same period last year. What drove investors to distraction was that the company forecast revenue would rise as little as 1% in the first quarter of this year.
Pessimists about the company’s future say the popularity of its clothing lines and accessories has come and gone. Apparently, competitors Alo Yoga and Athleta have taken much of its market share. Among the reasons Lululemon has done poorly is its failure to evolve. The Economist wrote, “Fashion trends have not helped. Gone are the days when fashionistas worth their Vogue subscription wore Lululemon leggings for the coffee run, school run, or just to run.”
It’s too late for the company to solve its problems. Will the last person who leaves turn out the lights?
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