LULU - Our Take On A Chip-Led Buyout

Takeaway: Buyout speculation makes sense but far less likely than a Strategic Buyer. Most likely, and best, outcome is Chip selling stock outright.

This noise in the press about Chip Wilson lobbying for a Buyout of LULU is right in line with our thesis that we outlined in our call on June 25th (see notes below). But let's be clear about something, though we're confident that we'll see meaningful change at LULU, we think that Buyout is one of the lowest probability outcomes. We give it about 10%, at best. We think a strategic buyer is more likely (20%). The only thing that is a lower probability than a Buyout is Wilson regaining control of the company. If he cannot get it sold, then we think we'll see him sell all his stock, which is probably the best and highest-return outcome for shareholders (yes, even better than a deal).  All in, Wilson's efforts, and the subsequent noise in the press is right in line with why this stock will work. Our rationale is outlined below. 






Conclusion: Today we hosted a conference call to discuss the rationale behind why we added LULU to our Best Ideas list as a long after the stock’s latest collapse. As we’ve said before, the call right now has nothing to do with our confidence in the business or the team running it. This is a company in a defendable category with an outstanding brand, a $95bn addressable market, and a realizable $4-$5bn revenue stream over 5-years. But the catch is that it’s still sitting on a $500mm management team and operating structure.  The good news is that never in LULU’s history has there ever been a path to creating value, and that’s due to the sometimes painful, and usually embarrassing presence of its founder, Chip Wilson. But we think that the Board structure that he created will ultimately lead to him outright failing in his current attempt to regain control of the company. That is likely to be a catalyst for one of many forms of change, which we explored in our presentation and deck.  We plucked out a few of the more salient slides that we think are worth considering. Let us know if you’d like the replay and the full materials.


The LULU Bracket

This diagram is noisy. It’s supposed to be. Start reading it on the left with the decision of whether or not Chip Wilson wins control of the Board We very generously gave him 20% probability. But in reality he’ll be lucky to get 10%. If he loses, which he will, we think that one of two outcomes is most likely; a) he sells his stock (35% chance) – representing 27.7% of shares outstanding, or b) there’s a deal – 10% likelihood of a buyout, or 20% chance of an acquisition. When all is said and done, about 80% of the outcomes get us to a price well above $41.


LULU - Our Take On A Chip-Led Buyout - lulu1


Outcomes, As We See Them

1)      Management Team Upgrade (49% probability): Each scenario results in a potential management upgrade, but the biggest likelihood is if Wilson sells his stock. All in, we get to a 49% chance of a meaningful change in management (including putting in place a high caliber CEO). This company needs better executives, and a lot more of them. This is a team that we think would proactively invest in systems needed to more appropriately discount product – something LULU sorely needs – and tackle its competitors head on instead of clinging on to a ridiculous hope of a perma 55% Gross Margin. The way it is being run today, the company is on its way to becoming Coach. We firmly believe changing that path is not a very difficult one. All in, this scenario gets us back to the discussion of $3-$4 in earnings power, or a $60-$100 stock (20x $3.00, and 25x $4.00).

2)      Deal (30% probability): The biggest barrier to a deal getting done in the past has been that Chip didn’t want it to happen. Now he’s likely searching for one. Our sense on Wilson is that he feels handcuffed by LULU. He’s not allowed to participate in anything having to do with the company aside from attend Board meetings, but he’s too big a shareholder to go off and start another brand (something he’s actually very good at) due to his non-compete. If he can’t gain control, he could look to get the company sold. We think that a buyout with a PE partner is not very likely – as there’s not a ton of private buyers that would take out a high margin company at 15x EBITDA. But we think that the set of strategic buyers is a) far more expansive and b) less price-sensitive.

3)      Status Quo (21% probability): This outcome pretty much stinks. The reality for LULU is that a status quo management team and status quo operating plan results in a far less than status quo stock price. We see about $10 downside to $30-32 if this is the case ($1.50 in EPS – 15x p/e and 10x EBITDA). This is the outcome that would cause us to pull the plug on our call – though we don’t think this will come to fruition.


LULU - Our Take On A Chip-Led Buyout - LULU2


Board Considerations

There’s a few reasons why Chip will likely not regain control of the Board.

1)      Giving up the title of Chairman in late 2013 is the worst thing Chip could have done. We think that was one of the final moves in a game of chess the real Board was playing with him. He agrees to step down from being Chairman if Laurent Potdevin gets the green light to be CEO. Potdevin is likely not the guy for this job, but it was a great move in hindsight by the Board.

2)      Why? Only the CEO, Chairman or a majority of the Board can call a special vote at LULU. Chip cannot do it. He literally has a better shot at selling the company outright than he does in calling a simple special Board meeting.

3)      There are 10 Board members, and three are clearly on ‘Team Chip’. But the Board has an offensive weapon in that it is authorized to have between 3 and 15 Board seats. All the Board needs is a simple majority (which Chip likely will not be included in) and it can appoint up to five new Directors -- none of whom are likely to be aligned with Wilson.

4)      Better yet, there are staggered seats with three year terms. So if Board members are appointed today, he or she doesn't have to be voted on by shareholders until 2017.

5)      All in, Chip’s ownership has been steadily shrinking, but his influence has been shrinking faster. He knows this. All the more reason to make a move to get out.

LULU - Our Take On A Chip-Led Buyout - lulu3


Who’s A Buyer?

We think that there’s a lot of companies that want to own LULU, but unfortunately, not a lot of companies can afford to do the deal at $8bn. We calculated the leverage for a host of suitors pre and post transaction, and also looked at year 1 accretion and dilution for each company. The punchline for us is that LULU is not likely to be bought by an American company. We’re thinking German, French or Japanese.

a)      Nike: NKE won’t buy what it thinks it can build for less money. Whether you agree with them or not is irrelevant. They think they can beat LULU organically, so they won’t buy it.

b)      Adidas: AdiBok needs it, can afford it, and couldn’t care less about near-term dilution. This makes a ton of sense.

c)       UnderArmour: This makes zero sense strategically or financially. I’m surprised I’m asked this so often.

d)      VFC: This would be a big nut for VFC to digest, but they could afford it – barely. VFC has gotten less value-conscious in recent years (i.e. TBL) so maybe it’s a possibility. But a dark horse for sure.

e)      PVH: This is a company that needs a deal like LULU, but it would crush PVH financially. Tough luck Manny.

f)       Fast Retailing: The Japanese owner of Uniqlo is looking to aggressively expand into the US, and needs to diversify away from its mall retail fashion push. The fit makes sense, the accretion is a no brainer even past $70, and let’s not forget that Fast was almost on the hook for buying J Crew in March for $5bn until it saw how bad Mickey’s business was trending.

g)      Kering: CEO is on the tape saying he wants to buy sports brands to augment Puma, Tretorn and Volcom. KER could digest LULU in a heartbeat. French company might keep Laurent on board, as well.

h)      GPS: This one is another consideration – albeit a long shot. It would take GPS’ debt to total capital to about 65%, which is likely far above the Fisher family’s comfort level. Perhaps GPS will be content chipping away at LULU with Athleta, which is crushing it.


LULU - Our Take On A Chip-Led Buyout - lulu4

LULU - Our Take On A Chip-Led Buyout - lulu5


LULU - Our Take On A Chip-Led Buyout - lulu6

LULU - Our Take On A Chip-Led Buyout - lulu7


Doves Kill

This note was originally published at 8am on June 19, 2014 for Hedgeye subscribers.

“And John bare record, saying, I saw the Spirit descending from heaven like a dove…”



God called Janet Yellen and told her to cut her US growth forecast and devalue the Dollar again yesterday. Thank goodness for that. What would we do without her?


Doves Kill - Titanic 03.31.2014


Back to the Global Macro Grind


As ridiculous as doing the same thing over and over and over again (and expecting a different economic outcome) sounds, the un-elected-economic-central-planning-authority did just that (again), targeting rates lower (and inflation higher), yesterday.


Not that anyone should hold them accountable to why, but here’s what the Fed did yesterday:


  1. Cut its 2014 US GDP Growth forecast from 3% to 2.1%-2.3%
  2. But kept its 2015 GDP Growth forecast at 3.0-3.2%


Ah, so doing more of what is slowing real-inflation-adjusted growth is the answer, eh? Cool. Maybe if you’re long slow-growth #YieldChasing assets like bonds (or anything that looks like a bond – Utilities (XLU) led the rally yesterday, closing at fresh new highs of +15.2% YTD).


If you’re the poor bastard living on $60,000 US or less (i.e. the median consumer in America)… Well, you can eat the all-time highs in cost of living, and like it. Because these doves are going to kill your real-wages.


As you can see in the Chart of The Day, before the Oil spike in June (this is a May number), American real-wages (what you get paid in terms of wage growth minus made-up government inflation) just went negative for the 1st time in 2 years. That’s gotta be good.


BREAKING: Fed Fueled Stocks Fly, Dollar Sags, Oil 9 Month Highs” –Reuters


That’s a pretty cool headline too, right? Notwithstanding that US Consumer Discretionary (XLY) stocks are still DOWN year-to-date and Energy (XLE) +12.6% and Utilities are leading the rally, who cares about the details.


In other news, divine intervention took the VIX back to 10 yesterday. As a friendly reminder:


  1. The VIX (US stock market fear index) has never (ever) held below 10 in US history
  2. Never, ever, is a very long time


“So”, with bond yields falling fast (again) and Gold rising (again), what do I think you should do now?


  1. Keep doing the same thing we have been saying all year (buy #InflationAccelerating and slow-growth #YieldChasing assets)
  2. And add more frequent prayer to your daily process on days that the VIX has a 10 handle


Even if you’re not religious, I think you should think outside the box here and just do it. Because this is not going to end well.


As opposed to making a backward looking call that the US is going to repeat the prior credit crisis, I think the next economic crisis is going to be perpetuated by Fed policy. These ideological doves are going to kill 70% of US GDP (consumption) with a Policy To Inflate.


Our immediate-term Global Macro Risk Ranges are now (with intermediate-term @Hedgeye TREND signal in brackets):


UST 10yr Yield 2.46-2.64% (bearish)

SPX 1928-1960 (bullish)

RUT 1155-1185 (neutral)

VIX 10.14-12.15 (bearish)

USD 80.07-80.63 (bearish)

EUR/USD 1.35-1.36 (bullish)

Pound 1.68-1.70 (bullish)

WTI Oil 105.14-108.28 (bullish)
Gold 1260-1286 (bullish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Doves Kill - RWG

July 3, 2014

July 3, 2014 - HE DTR JAN14

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TODAY’S S&P 500 SET-UP – July 3, 2014

As we look at today's setup for the S&P 500, the range is 29 points or 1.35% downside to 1948 and 0.12% upside to 1977.        













  • YIELD CURVE: 2.14 from 2.16
  • VIX closed at 10.82 1 day percent change of -2.96%


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Initial Jobless Claims, June 28, est. 313k (prior 312k)
    • Continuing Claims, June 21, est. 2.560m (prior 2.571m)
  • 9:45am: Bloomberg Consumer Comfort, June 29 (prior 37.1)
  • 9:45am: Markit US Services PMI, June final, est. 61 (prior 61.2)
    • Markit US Composite PMI, June final (prior 61.1)
  • 10am: ISM Non-Manufacturing Composite, June., est. 56.3 (prior 56.3)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 1pm: Baker Hughes rig count



    • House, Senate on recess until July 8
    • 6am: Quinnipiac releases public opinion survey of Iraq troops, background
    • checks for gun purchasers, stricter gun laws
    • 12:30pm: Transportation Secretary Anthony Foxx, holds news conf. with Gov.
    • Lincoln Chafee, D-R.I., on Highway Trust Fund
    • U.S. ELECTION WRAP: Incumbency Worth $500k



  • ECB watchers seek Draghi illumination on path from low rates
  • Obama decries trader bonus system as risky even after Dodd-Frank
  • Arthur becomes hurricane off U.S. East Coast
  • VW rejects comments by Daimler’s Bernhard of possible Paccar bid
  • U.K. services employment rises at record pace as demand jumps
  • Ackman’s Pershing Square fund Is said to gain 25% in 1H
  • Occidental talks for Middle East unit stake sale said to falter
  • Dimon’s cancer has 90% cure rate with demanding therapy
  • Amazon plans to fight FTC over unauthorized mobile-app purchases
  • ‘Transformers’ shows worldwide appeal with China outdrawing U.S.
  • Siemens CEO chasing U.S. gas boom has ‘firepower’ for deals
  • Qualcomm buys Wilocity to step up challenge to Broadcom in Wi-Fi
  • Tesla approved by Pennsylvania assembly to add company stores
  • Salesforce considers acquisitions in Germany to spur growth
  • U.S. equity markets close 1pm ahead of July 4 holiday



    • International Speedway (ISCA) 7:30am, $0.48



  • Chinese Trader Said to Pledge Metals Three Times Over for Loans
  • World Food Prices Fall for Third Month as Grains Lead Decline
  • Cotton Boom Goes Bust as Texas Rains Revive Surplus: Commodities
  • Libya Reopening Two Oil Ports After Taking Control From Rebels
  • Arthur Strengthens to Become First Atlantic-Season Hurricane
  • Gold Retreats From Three-Month High Before U.S. Payrolls Report
  • Nickel Climbs to Highest Since May as U.S. Data Boosts Demand
  • Steel Rebar Falls From 1-Week High on Chinese Mills Supply Glut
  • Palm Oil Declines as Drop in Crude May Ease Demand for Biodiesel
  • Coffee Gains for Second Session; Sugar Drops as Surplus Raised
  • Sugar Millers in Thailand Urge Market Prices to Avoid Smuggling
  • Rupture-Prone Oil Trains Keep Rolling a Year After Quebec Crash
  • Conditions Not ‘Ripe’ to Decide Weda Bay Project in ’14: Eramet
  • Corn Nears Bear Market on Outlook for Biggest Ever U.S. Harvest


























The Hedgeye Macro Team
















VMR Products Call Replay And Key Take-Aways

Today we hosted a conference call on electronic cigarettes & e-vapor products with Jan Andries Verleur, CEO and co-founder of VMR products, a leading global online manufacturer with brands V2 Cigs and Vapor Couture.   


Jan co-founded VMR Products in 2009. Beyond the company’s online presence, its products are found in 40,000 domestic retail locations and 50,000 worldwide. The call is part of a series of talks we’ve held with industry experts (previous speakers included CEOs of NJOY, LOGIC, Ballantyne Brands and Victory). On the call Jan offers valuable industry commentary – including key insight on sales and consumer trends that may be shifting to larger e-vapor products and away from Big Tobacco’s smaller “cig-alike” e-cig offerings.


Below we provide key commentary from a robust Q&A with Jan.  We also encourage you to listen to the recording. 


Click for the replay podcast

Click for LOGIC’s presentation



Key Q&A Callouts:

  • Are Proposed FDA Regulations surprisingly light? There was no proposed bans or limits on marketing, flavors, or online sales?   Jan says VMR is very active in regulatory affairs and met with OMB prior to proposed regulations … he believes that regulatory proposals are responsible and take into account the importance of innovation.
  • Retail versus Online Consumer and Online regulatory concerns. He says in retail stores there’s only limited shelf space/limited SKU breadth, so you can only have so much of the consumer’s attention, however online is different… online users visit websites numerous times before making a buying decision, consult third party reviews and blogs, and so therefore they’re a higher educated consumer. The name of the game for online business is SKU breadth, but by limiting the sale of these products online you essentially hand the industry over to tobacco players. He thinks the OMB appropriately addressed this issue by not restricting (online) accessibility.
  • E-cig vs E-vapor trends. What is the function of the recent decline in measured e-cig sales? (Sales have flattened since the summer 2013 and are down a second consecutive month to -6.1%Y/Y in the four weeks ended June 15th, according to IRI). Jan underlines that the e-vapor category (and not the traditional e-cig or “cig-alike” aka micro-cigs category that most of Big Tobacco primarily sells) has not seen any substantial decline on volume, when looked at globally.  The area of decline is in micro-cigs, specific to trade, and he believes it’s a function of the lack of product quality (and therefore experience) delivered to the retail end user.
  • Large scale vaporizers appeal is the newest trend online, and their appeal is strong battery life (not limited to the confines of a small cig-alike) and amount of liquid they hold. These products are just now beginning to find their way into retail trade, but of course are not being specifically counted with Nielsen and SMA data, because they’re often sold in alternative (non-counted) channels.
  • “Cig-alikes” have Consumer Appeal? According to Jan, consumers are not looking for a product that looks identical to cigarettes they’re looking to leave behind (Hedgeye note: this flies squarely against NJOY’s  messaging), they are looking for a product that fulfills and satiates their appetite for nicotine without smoke (and less harm) that’s convenient. He believes larger devises are winning out because 1) they can provide a longer battery life, and 2) they offer a greater level of differentiation from traditional tobacco smoking.  He however doesn’t think the cig-alike category will disappear as there will be people that don’t wish to deal with refilling e-juice, etc. 
  • On optimism around future Cig-alike technology. He expects that improvement in future version of cig-alike versions will more evenly balance the playing field with larger e-vapor products, and that ultimately (regardless of form), both smaller and larger sized devises can win consumer appeal if the quality/user experience in delivering the nicotine is high (without combustion).
  • How large is the U.S. e-vapor category worth today?  Jan thinks the cig-alike category is around $350MM online, and large scale devises (or non cig-alike) are worth $200MM online to $350MM. For trade, in what can be tracked, the figure is near $1B, but there’s also offline trade that can’t be tracked.  All U.S. vapor products could be as high as $2B in 2014.
  • Any thoughts on blu's recently launching/testing a vapor product in the UK?   The product that blu has tested (blu pro kit) is essentially a private label technology that blu decided to sell. It is essentially a rebranded, generic product that’s similar to many like it produced in China. On July 4th, VMR is bring online V2 Pro series (3-in-one-vaporizer that can vaporize anything the consumer wants to).
  • Color on the quality of the e-liquid, battery, atomizer from China?  Manufacturing shifting to U.S.A.?  Jan says when it comes to product quality it’s all about who you are buying from, and this can be found in all places from Idaho to Uzbekistan, so manufacturing in China is all about quality of the relationship. He says companies that don’t have the staff on the ground to manage the manufacturing process will be at a great disadvantage when it comes to regulatory issues.
  • Geographic Opportunities?  Yes - Europe, China, Russia.  Today over 70% of VMR’s revenue is in the U.S., but Europe and PRoC are its targeted growth markets. In 2016/17 he thinks China will emerge as a huge opportunity for vapor technologies. He also views Russia favorably, especially as tobacco regulation comes down more heavily on where you can purchase it and higher excise tax. Finally, Europe, especially when talking about large scale devises has a lot of growth runway (the U.K. is currently the largest market worth around $350MM).   
  • Latin and South American Opportunities?  Jan says it’s a good market but there are a series of problems throughout the region. He say VMR is successful in Ecuador; growing in Colombia; had regulatory issues in Costa Rica, Panama is closed down; Brazil is difficult unless doing domestic manufacturing. From a regulatory and business perspective as of today, Jan is much more favorable on the opportunity in Europe, China, and Russia.
  • Disposables versus rechargables micro-cigs? Does one lead to the other, or based on occasion?  Jan believes that disposables play very well at retail, while they’re very hard to sell online. The reason for that is the online consumer will realize that best products aren’t disposables, and it’s more economical to buy rechargable (especially as online buyers tend more towards bulk buying at a discount). Unlike tobacco trends in where 70% of smokers buy a pack a day (rather than a carton), Jan believes that consumers that committed to the e-cig/e-vapor category will drift into rechargables and large scale devise products over disposables. Expects disposables to remain 50% of c-store sales, but to diminish in future years.
  • Consumer and Vape Shop Demands.  Jan describes a typical vape shop consumer looking for an endless supply of e-liquids, wants devise selection, and may look for the $50, $100, or $250 vaporizer. (There are roughly 15,000 vape shops across the U.S.).   He views this type of consumer very differently than a traditional cigarette smoker looking for an alternative to combustion, who likely gravitates towards the c-store. In any case, no c-store will be selling a $200 vaporizer, so he see some clear lines in the sand based on channel with some opportunity for product/consumer overlap. 


We invite you to read a note published this morning titled Tobacco Trends – PM Shorter Term Struggles Persist; LO Bulls that details our updated outlook on the tobacco and e-cig/e-vapor markets.  Jan’s commentary, along with all the CEOs we’ve profiled, in conjunction with new data we’ll soon be releasing on an e-cig/e-vapor survey, help to inform our thinking on the direction of the category, and therefore estimate the impact on Big Tobacco’s portfolio.


We hope you can join us for future expert calls, including our next E-cig Speaker Series featuring CEO John Wiesehan Jr. of Ballantyne Brands on July 16th at 11am EST. More details to follow. 


Happy 4th of July!!!



Howard Penney

Managing Director


Matt Hedrick



Fred Masotta


Tea Leafing the June Jobs Report

Editor's note: This is a complimentary research insight from Hedgeye macro analyst Christian Drake. Click here for more information on our products and services.


On a month-to-month basis, the payroll estimates from ADP and the Bureau of Labor Statistics can differ substantially.  However, on a multi-month, moving average basis, the relationship between the ADP & Non-farm private payroll (NFP) figures is pretty decent. 


This is more analytic musing than convicted forecasting, but for the co-integration tea leafers…..the regression using the 3M rolling average in the ADP series (updated for this morning’s data) suggests +217,000 on the June NFP Private payroll print (current estimate = 213,000)

Tea Leafing the June Jobs Report - tea leaf reading


Historically, it appears the tendency is for NFP to re-couple to ADP after outlier moves (counting actual payrolls may be more accurate than calling up some smaller cross-section and asking questions….whoulda thunk). 


More to be revealed tomorrow morning...


Tea Leafing the June Jobs Report - ADP vs NFP

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