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When we added Lululemon (LULU) to our Best Ideas list back in June 2014 (we removed it from our Best Idea's List on 3/24/15) we outlined probable outcomes stemming from controversial founder Chip's Wilson’s activist push. Where we shook out after weighing the various puts and takes was:
- Chip would not get his way.
- Chip would eventually sell his stock.
We have long maintained that Chip is a brand builder, not a brand leader. He was very vocal in an interview with PwC last year about his displeasure his non-compete imposed restraint. The writing officially appears to be on the wall for his complete exit from the company now that “Kit and Ace” (the luxury apparel brand founded by his wife and son) is nearing critical mass.
In our LULU Black Book in March 2015, we said that there’s $4.00 in earnings power hidden in this company, but we needed the conviction that management could find it. We are still far from convinced, though the leadership on the board has proven over the past year that it is willing to separate itself from Chip.
In order to justify a 30x p/e and give anyone hope of a share price in the $70s or $80s, we think that the company needs to completely reset its business model.