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LULU | CEO IS ON THE BLOCK NEXT

Takeaway: LULU’s decision to eliminate the role of Chief Product Officer and its current occupant makes all the sense in the world to us.

LULU’s decision to eliminate the role of Chief Product Officer and its current occupant, Tara Poseley, makes all the sense in the world to us. Is it because the product in the store looks horrible right now? No. But the company’s lack of a coherent operating plan combined with her consistent inability to prevent competitors from closing the gap in LULU’s core business makes this decision a no-brainer to us.  

While Poseley might well deserve to be sacked, we think that this is really a precursor to CEO Laurent Potdevin getting ousted. Whether he’s making moves to deflect blame and buy some time, or he genuinely thinks these moves will reaccelerate growth – it all really ends the same way – with Potdevin being shown the exit in CY2016.

For starters, a company doesn’t fire its Chief Product Officer when business is just so darn good. Yes, she was hired during the tenure of a lame duck CEO, but it goes without saying that the Board (almost identical to the Board who ousted Chip with the exception of the two Advent members) had a big hand in bringing her in a month and half before hiring Laurent Potdevin to steer the ship.

Posely had been tasked with picking up the pieces after the company’s Luon fiasco in early 2013 that led to the ouster of then CEO, Christine Day, and Chief Product Officer, Sheree Waterson. Now that position has been eliminated (a nice way of saying Posely was fired) for the newly created position of Creative Director who will oversee both Men’s and Women’s product design. That position will be filled by Lee Holman who joined the company as SVP of Women’s Design in the fall of 2014. Holman was previously VP of Apparel Design at Nike, and when he joined LULU, the company did not even deem it worthy of a press release, just a mention in passing on a conference call. At the time he was considered a low-ish profile hire. Has that much changed in a year? Probably not.

The company was in the 7th inning of reworking its go to market calendar and product engine which was set to be completed and rolled out in 1Q16. Safe to say at this point that will at least be pushed out by a minimum of 12 months as Holman and newly created but yet to be filled Chief Supply Chain Officer look to put a stamp on the process improvements.

The company had been guiding to 300bps of merchandise margin recovery in 2016 due to improvements in the go-to-market calendar – specifically from lower air freight, improved raw material management, and better product costing. We think its safe to assume that that benefit will be pushed as well.

Bottom line, this stock was at $40 a year ago, and there’s no reason it can’t get there again. We think there’s a better chance of $12 downside from today’s $52 than $5 up. If the stock doesn’t trade down on this immediately, we’ll get louder on it as a short. There’s more bad news to come.

09/10/15 11:42 AM EDT

LULU | IN SEARCH OF TAIL

Takeaway: This qtr was a mess due to factors far beyond financials. LULU isn’t articulating a cogent plan – bc it probably doesn’t have one.

There’s one major reason why we think this LULU quarter was a huge let down -- and it’s not that inventories were up 23 days while Gross Margins missed by 200bps. Nor is it that LULU added $62mm in revenue year over year, but generated $1mm less in EBIT.  It’s the reality that this company does not know what it wants to be. Virtually every statement out of management on the call had to do with near-term tactical branding, marketing and product plans. All that is fine. It matters on some level – and definitely matters to small scale moves in the stock in the coming quarters. But that’s what we call TREND (in HedgeyeSpeak that translates to 2-3 quarters out – the near-term modeling horizon). This is where LULU lives, unfortunately.

But LULU needs a change of address. This is an extremely powerful brand in a solid, yet increasingly competitive, space. LULU needs to not only be a great brand, but a great company. Then and only then will it be a great stock. We think management is coasting on the power of the brand, by tweaking a legacy operating plan, blindly opening stores, and hoping that nothing else goes wrong. Hope, however, is not a profitable growth process.

LULU needs to live in the TAIL (which we define as 1-3 years). What we need for real wealth creation with this stock is for a clear, concise strategy that insiders rally around and are paid handsomely to implement. People need to look to $4.00 in earnings power, and believe in it. It’s that same strategy that would result in its CEO standing up and saying things that will make Nike, UnderArmour and Athleta quake in their boots (which used to be the case) – not that they are using ‘Sports Psychology on the Pant wall’.  Unfortunately, we truly think that LULU does not have a proactive process to grow its business.

Does The Company Have A Long Term Plan?

Somebody, please, ask virtually anyone in the company if they know their market share in stores and online within an hour’s drive of each store. [Note: our math shows it ranges from 2.5% (Long Island) to 26.7% (Burlington Vt) -- ping us if you want the data]. We don’t think they’ll tell you – because they probably don’t know.

How can a CEO stand up and give credible growth and profitability targets without knowing these basic building blocks?  How can they articulate why they don’t have a wholesale model – something that could be a home run for LULU (i.e. sell where the consumer shops)?  Even the CFO, who we have/had high hopes for, hasn’t created his own identity with the Street – as he’s following the same script of his predecessor who was pushed out.

All we get from the company as it relates to strategic initiatives are 1) Brand, 2) Community, 3) Innovation, and 4) Guest Experience.  The only quantified metric is that LULU will return to a 55% gross margin – something that we don’t think is realistic without meaningful backing by the balance sheet (i.e. more capex to boost profitability). But more importantly, the market is highly unlikely to pay for a passive goal to return to peak profitability when LULU is in a different stage of its growth cycle.

This is a great Brand, for the time being. We really want to get behind this story due to the potential that can be unlocked. But without the backing of a great company – we think this stock is going anywhere but up. We’re glad we pulled the plug in March.