There are six pillars to our LULU Short call. One of them (only one -- Ivviva) was proactvely addressed this quarter. But this really comes down to a management call. The ‘Good to Great’ roadmap is nowhere to be seen at this company. Which is a shame, bc it is a killer Brand with a tree-hugger (is that the opposite of Killer?) team.
1) Not enough talent embedded to reach $3.00 in EPS power. We need a BIG management change, and the capital budget to reaccelerate top line.
- Potdevin arguably just bought himself a few more quarters as CEO
- I think the reality is that Potdevin is a perfectly adequate CEO if LULU wants to muddle along as a $2-$3bn company with Nike-ish margins. There’s your $1.75-$2.25 EPS power. That’s pretty much an annuity from the current rate – which probably isn’t worth more than 13-15x earnings. There’s your $28 stock.
- The sad part of all of this is that this brand is Great, but the management team is simply ‘Average’. A great management team can bridge the gap to Great. And with a great management team AND a great brand – it invariably ends up as a killer stock. It’s near impossible for us to even consider a $3+ EPS power (what you need to buy the stock here) with this current team.
- Until we see a MAJOR change – which equates to Potdevin being fired, Glenn Murphy bringing in Steffan Larsen AND giving him a BIG capital budget which would take down numbers before it accelerates growth. Until then we wouldn’t go near this thing long-side. And on the pop after the close, I’d press the short.
2. Store growth tapped in quality locations in US and Canada. Already in top 250 MSAs, and now seeing full-in growth in less desirable locations. Just bc lease terms getting better does not mean the brand has the right to grow into the boxes being given away for free.
- Stores comped negative 1%, first negative comp in 8 quarters. Total comp was also negative, the first time in 11 quarters.
- The result is not just seen in stores. Ecommerce growth slowed to 0%, the worst we have ever seen and nearly a 1200bps slowdown on a 2 year basis.
3. Int’l growth is dilutive at best – perennially money-losing at worst
- Accelerating expansion, opening 15 new doors this year, on a base of 55 and 12 adds last year.
4. Growth in Men’s biz is necessary, but less defendable than the core w MUCH stiffer competition. Nike already has a Yoga business 2x the size of LULU. That spread is likely to increase. Dynamics are even less favorable in Men’s category.
- Men's grew HSD in 1Q, slowing from 20% last Q.
5. No Wholesale pipe
- No mention in this call. The issue here is that LULU doesn’t have the pipe or infrastructure to design/source/market/sell different sub-labels (good, better, best). Even UA tried and failed. With current investment base and talent pool at LULU, it’s likely to fail – if it tries (which it needs to).
6. Ivviva is a broken growth initiative. Lower prices for the same unit sale dilutes ASP, and takes down e-comm margins (cost the same for LULU for a return on $80 pants for a 12-year old as it does $140 pants for a Gen X-er.
- Clearly, a big change here. Restructuring by taking a $50mm-60mm charge ($0.30). Closing 40 out of 55 stores and converting half of those left to lululemon stores. In effect, Ivviva is going the way of Jack Spade. For the record, when KATE closed Jack Spade stores, it was losing money. When it sold itself to COH three years later, Jack Spade was still losing money.
- Not clear what the company will do with all the Ivviva leases. While we have yet to do the math (we’re currently going through store location math) the logistic strategy has been to put Ivviva stores within close proxiity to Lululemon stores.
- These leases are probably not sellable (actually, they’re definitely not sellable), and have an average duration of 4.3 years. Not as easy to get out of them as a retailer like Abercrombie – which is sitting at 3 years.
- Can’t fill those boxes with Lululemon product else risk more cannibaliation. Does not seem like mgmt is planning to do that for more than 6 or 7 of the boxes. So we’re basically seeing a special charge to walk away from property and store-related severance (can’t cut design, sourcing and distro heads – and arguably have to add ecomm).
