LULU - Chip Reasserts Himself. We're not betting on management.
The soap opera continues at LULU.
First Chip traded his chairman title/power for the appointment of new CEO Laurent Potdevin. That led to Wilson being effectively neutered on the Board and to him selling half his stock to Advent in August of '14.
Then Chip announced that he would be stepping down from the BOD in February and put the processes in motion to sell his remaining stake in June of 2015.
Rather than walk away into the sunset, sell his stake now worth $1.25bn and focus on his family's new project Kit & Ace, which Chip talked about in an appearance on Bloomberg in mid-December. He is now asserting his right (per the 2014 agreement with Advent) to appoint a new member to the BOD. He chose LULU's former CIO (2010-2014), Kathryn Henry, to be his advocate. And couldn’t help but deliver a few pot shots about the company's current corporate governance.
So what would we do with the stock?
This company has at a lot of levers to pull especially on the GM side, and has lost 600bps in product margin over the past 4 years (see chart below). The top line looks relatively healthy, accelerating on a 2yr basis throughout 2015 against easy compares last year. But, now LULU starts to comp that in 2016. The US market is all but tapped out in terms of unit growth, with the company focusing on expanding existing footprint. International results have varied, with winners in Asia mixed with unenthusiastic 'on track' remarks on Europe.
At 28x next year's number we'd argue that the GM improvement is all but priced in and we have to assume that the company continues to comp in the mid to high single digits in perpetuity. That leaves little room for an operational hiccup from an unproven management team. A bet we're not willing to make. We like it as a short.
Our only concern is that with 27% of the float held short, so do a lot of other people. Still, that doesn't change the mismatch between the long-term growth trajectory and elevated valuation.
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