Investors Should Stay on the Sidelines of lululemon
After multiple quarters of weak performance, we are increasingly concerned that the brand is permanently damaged at some level.
Market Update
Lululemon Athletica (LULU) continues to struggle to put distance between its prior mishaps and recovered profitability. In an athletic apparel market that remains competitive, with new entrants offering merchandise that is equally compelling, we believe it is imperative for lululemon to ensure it is putting its best foot forward in all capacities.
After multiple quarters of weak performance, we are increasingly concerned that the brand is permanently damaged at some level, and that our positive trend rating is threatened. In our opinion, lululemon's lack of an economic moat has become even more evident over recent quarters, as same-store sales have remained negative and the competition has grabbed share of the lucrative athletic apparel market. We will probably tick our fair value estimate down modestly in response to results, but would remain on the sidelines until we gain clarity on the business's recovery and ability to achieve positive same-store sales.
On top of weak first-quarter results, the company announced that longtime CFO John Currie will retire. We view the departure as inconvenient during a volatile time for the business, but not detrimental to the vision or development of the business longer term.
The lack of a CFO in place does add some uncertainty in the near term. More disturbing on the management front is the rift that has developed between founder Chip Wilson and the board of directors. While we believe this is just unnecessary noise distracting the board from doing its job, it's concerning that a 27% shareholder has dug his heels in on renominating two of the three directors up for election this year and has taken issue with the leadership. With Wilson and the board releasing separate statements Wednesday, we are worried that Wilson could vote wildly on certain issues and prevent outside shareholders from achieving the best outcomes. As such, we would prefer to watch it play out from afar.
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