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Stock Analyst Update

Will CEO's Ethical Missteps Tarnish Lululemon's Brand?

While there is always brand risk associated with allegations of ethical missteps, we think the board's swift and decisive action will likely mitigate this.

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Narrow moat  Lululemon’s (LULU) shares continued to decline over 3% after market close on Feb. 5 as news of Laurent Potdevin’s resignation broke amid concerns over ethical missteps. We expect little operational impact as three of Lululemon’s senior leaders are being elevated and are taking on additional responsibilities. Celeste Burgoyne (executive vice president, americas) will oversee all channel and brand-facing aspects of the global business. Stuart Haselden (COO) will be responsible for all operations related to finance, supply chain, people, and technology. Sun Choe (senior vice president of merchandising) will lead product development, design, innovation, and merchandising. All will report to Glenn Murphy, an executive with extensive experience leading retailers including Gap and currently executive chairman of Lululemon’s board, while the search for a new CEO commences.

Although we acknowledge that there is always brand risk associated with such allegations, we think the board’s swift and decisive action will likely mitigate this. In our opinion, the board successfully got in front of this story and took a firm stance both in word and action about the brand’s commitment to the highest levels of integrity and respect. Therefore, we see no change to our standard stewardship rating and foresee minimal impact to demand. We continue to model low-double-digit revenue growth on average annually over the next five years and adjusted operating margin expansion from the high-teens to the low 20% range. That said, we think the market has more than baked this upside into the share price with the stock trading north of our $66 fair value estimate. We would wait for a more attractive entry point.

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Bridget Weishaar does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.