Why Lululemon Founder Chip Wilson’s Departure Is Good For The Company
Summary Lululemon Athletica founder Chip Wilson has recently announced his departure from the yoga apparel company he founded and built. Lululemon stock declined over 1% on the news. While Wilson has been a good corporate executive for Lululemon for most of its history, his presence has been more of a liability in recent years. Lululemon is now better able to attempt putting the past behind them, which will be a positive catalyst for the stock. Earnings trends and a reasonable valuation are likely to push the stock upward in the future. Canadian yoga-apparel maker Lululemon Athletica (NASDAQ: LULU ) founder Chip Wilson has recently announced his departure from the company he founded and built. In response to the news, Lululemon stock declined over 1%. Is this decline indicative of a harder future for Lululemon, or should investors view this development as a positive for the company and for shareholders? Wilson’s Accomplishments Chip Wilson’s tenure at Lululemon has been marked with a series of notable achievements. After all, he is the man who started off the whole company from a small location in Vancouver, Canada, in 1998, and has since then expanded the company into a global brand with a loyal customer base, with 250 stores across the world. Wilson’s entrepreneurial spirit and long-term focus are commendable in an era where many are only concerned about the short-term. Lululemon broadened its reach and its customer base under Wilson at impressive rates. Wilson left as executive in 2012 to take some time off from daily management of the firm, but returned in 2013 to help bring back Lululemon from a downturn in sales and a controversy over the quality of its clothes. Unfortunately for Lululemon, this controversy proved to be a devastating event for the company’s PR image and its financial standing, as well as the reputation of the company’s CEO. Wilson’s Stumblings In Recent Years While Wilson did help Lululemon recover from a crisis after he came back, he has had his share of mishaps in recent years that have infuriated customers and had significant negative effects on the company’s financial performance. The most noteworthy of these mishaps is the aforementioned scandal regarding Lululemon’s pants. Wilson has been a lightning rod of controversy after insinuating that quality problems with Lululemon pants were related to customers’ body types, seemingly blaming consumers for the problems with see-through pants. This led to an incredibly awkward and, what many consider a misguided, 50-second apology video that he posted on YouTube – not to the consumers he offended, but to Lululemon workers. So, Why Is Lululemon Better Off Overall? While Lululemon is indeed losing a key figure in its development into a global brand, I believe the team replacing him is more than capable of managing the company without him, as seen in the past couple years when Wilson has taken smaller and smaller roles. After rescuing the company from crisis, Wilson is leaving the company in the competent hands of Lululemon’s core team. This core team has been operating well under a less influential Wilson. The company is being left in pretty good shape, as seen from IAEResearch: Lululemon has revised its fourth quarter earnings guidance upwards – the company now expects its net revenues to be in the range of $595 -600 million as compared to previous range of $570-585 million for the quarter. This increased top line growth is based on the comparable sales increase of around 6-7% on a constant dollar basis as compared to the previous total comparable sales increase of low single digits on a constant dollar basis. The company also expects a rise in its bottom line growth and increased its diluted earnings per share range to 71 – 73 cents for the fourth quarter as compared to previous EPS guidance range of 65 – 69 cents. Wilson’s departure and the subsequent drop in Lululemon’s stock price may be a good entry point for a stock with a niche yoga pants market, increased earnings guidance, high margins, high net operating cash flow that has increased by 79.50% since the same quarter last year, and a reasonable valuation. The stock’s P/E ratio TTM of 40 is a good benchmark for future growth and is right at Lululemon’s historically average P/E ratio TTM. Also, Lululemon’s valuation is less ambitious than Under Armour’s (NYSE: UA ) 86 P/E ratio, meaning that the stock has more room to run without hitting a ceiling of stagnating growth. Lululemon’s operating cash flow is also substantially higher than the industry average growth rate of 56.32%. To be frank, Wilson’s departure can only be good for Lululemon, as his continued presence would have been a continual source of irritation for consumers and shareholders alike. Wilson’s continued presence at the company is only bound to be a sore point with customers who were riled with Wilson’s supposedly insensitive comments. After helping the company get back on its feet, Wilson feels now is the best time for him to leave, and there probably isn’t a better time to do so. Despite Wilson’s accomplishments, the sour taste of the pants scandal remains in some customers’ mouths, and it’s in Lululemon’s best interests for Wilson to leave at this time, as he essentially has done all he can do for the firm. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.