Lulu Girds Against Activist Investors

Growing sales, rising stock make a good defense.

Namaste, would-be Lululemon activists. 

The yoga-and-athletic-gear retailer added the threat of activist investors to a list of risk factors included in its annual filing released Wednesday. It warned that "responding to actions by activist stockholders can be costly and time-consuming, disrupting our operations and diverting the attention of management and our employees" and could "interfere with out ability to execute our strategic plan." 1

Sure, the new disclosure could be the result of good lawyers responding to what some industry observers have called "peak shareholder activism." It's a rare day when we don't hear about Bill Ackman, Carl Icahn or some other outspoken investor's plans to shake up a company, prompting firms from Clorox to Children's Place to issue similar warnings.

But it's certainly not a stretch to suggest activists are keeping abreast of what's going at the company that helped create an entire "athleisure" category devoted to high-priced yoga pants and colorful sports bras. 

Lululemon has spent the past few years in one bind or another. First there was the sheer-yoga-pants debacle, then came the resignation of CEO Christine Day. Chairman Chip Wilson, who infamously said some women's bodies "don't actually work" for his yoga pants, unceremoniously exited the company he founded and sold 50 percent of his shares to private equity firm Advent International.

From June 2013 to June 2014, the stock price went from $82.50 to $37.61, a 54 percent drop. Even after Toms Shoes President Laurent Potdevin took over as chief executive in 2014, Lululemon struggled to fix supply chain mishaps and sell piles of extra inventory. 

Bumpy Road

Lululemon's shares are up 28 percent so far this year as the yoga retailer regains its posture.

Source: Bloomberg

Lululemon certainly looked ripe for an activist. Its stock had been hammered. Its valuation was relatively cheap. Costs were rising, profits were falling, and key executive positions were empty. The company became a regular subject of deal chatter as a buyout candidate for NikeUnder Armour, or VF Corp. 

Pricey Pants

Lululemon's forward price-to-earnings ratio shows the yoga wear maker's stock getting more expensive

Source: Bloomberg

But lately, Lululemon has started to regain its balance (and the 16 percent stake owned by Advent, as well as the private equity firm's two appointed board members, should deter activists thinking about getting involved). 

The company still has a ways to go to get profit margins back to where they once were. But on Wednesday, it reported better-than-expected sales figures that sent its stock soaring 11 percent.

Lululemon's Looking Up

Same-store-sales growth topped 11 percent in the fourth quarter of 2015

Source: Bloomberg

It outlined a series of growth objectives to more than double its earnings by 2020. It noted e-commerce sales grew by more than 30 percent in the fourth quarter from a year earlier. Meanwhile, Lululemon is building stores around the world, increasing its store square footage by 15 percent in 2015.

Perhaps more telling is that, with Potdevin at the helm, the company finally seems to be grasping the retail basics. Getting the details right -- like shifting more of its shipping to ocean freight from air freight, or putting both men's and women's clothes under the same management -- can make a huge difference. In retail, the little things are the big things.

Athletic apparel sits on display inside a Lululemon Athletica Inc. store at International Finance Centre mall in Hong Kong, China, on Monday, June 22, 2015. Lululemon Athletica opened their first retail store in Hong Kong on June 19. Photographer: Xaume Olleros/Bloomberg

Pant Wall

Photographer: Xaume Olleros

For instance, simply lining up pants by how they fit, on what Lululemon refers to as its "pant wall," boosted sales of women's bottoms by 19 percent from September to January, the company said Wednesday. 

Potdevin might not rock the yoga world the way Lululemon founder Chip Wilson once did. But it's increasingly clear the Swiss-born snowboarder can help Lululemon get its groove back. And a combination of a rising share price and increasing sales could end up being the best defense against activist shareholders.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. The clause originally appeared in a quarterly financial statement last year but this marks the first time it appears in an annual report.

To contact the author of this story:
Shelly Banjo in New York at

To contact the editor responsible for this story:
Mark Gongloff at

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