Try to poke a hole in this LULU print. Seriously…try. I’m not going to go through the puts and takes – this is one of those quarters where it’s not necessary. Maybe the fact that Murphy led the call is such a big halo that the company literally could do no wrong. But sales +18%, Gross Profit +22%, EBIT +31% and EPS +33%...? Fo real? I agree with Murphy that this is the kind of result you frame in lucite, put on a boardroom wall and follow it in every business planning session. Granted, it is the result of a team put in place by a CEO that was just fired. And we can all be sure that Laurent was fuming while listening to this call (while kicking himself for his personal lack of discretion, morals and ethics). On that note, my biggest concern is that when a ‘non Stefan Larsson’ CEO is announced the market will flip. That’s simply too consensus a call, and the guy is just too good to stay in the narrow world of apparel retail. He’s far more likely to get picked off by someone bigger and better. My bet is that there’s less than 25% chance that he’s the guy.
But if there’s one thing I learned throughout my career, it’s that you always want to take a job when you got the chops, and your predecessor was flat out bad. That’s kind of the point here. Laurent was a 0.5 on a scale of 1-10. With him at the helm, we’d have seen as many steps backward as forward, and LULU would be locked in an earnings annuity of $2.00-$2.50. Whomever Glenn Murphy picks to be the new Boss will be better than Laurent (who Chip got into the C-Suite only by trading his Chairman title – which was a no-brainer, no-risk trade for the Board). This is one of the most powerful brands in retail, that came out stronger even when faced with gaffes like when Chip Wilson called his core customer fat. The fact that it is sitting at an 18% EBIT margin with such mediocre management is a testament to that.
The new CEO will have to invest capital – we need accelerating store growth in men’s and international – with strengthening consumer connectivity with the latter. It might even need a selective wholesale model. It absolutely needs the infrastructure to tier product by price point, by consumer, by channel. This means human capital – a lot of it. That said, I’d argue that it could be a $5bn company (ie double) before such tiering matters – keeping in mind that when the behemoths like Nike report a $30bn number that equates to about $60bn at retail. At the consumer level, LULU is about a third the size of UnderArmour – yet the brand is stronger, the company is actually stable, and there is a Board without a monopolized share structure that actually enables positive change. And naturally, UA trades at 21x EBITDA and LULU trades at 18x.
Once the new team comes in, we’re likely to see numbers come down as the capital deployment plan is laid out. I’m not concerned about that – so long as the company provides the roadmap to $3-$4 in EPS power – something that was never part of the narrative – not even when LULU traded at 30x EBITDA in 2013 and 2016. Will this stock double from here over 18-24 months? Probably not. Arguing zero multiple expansion gets you $105 in 12 months, and $125 18-24 months out. Not bad for a name that won’t blow you up.
