Murphy finally handed the reigns over to a new CEO – Calvin McDonald – a 46-year old former CEO of Sephora US. He’s got both the age, the pedigree, the female customer experience, the highest profile endorsement you can get in retail (Glenn Murphy) -- and yes, he's Canadian – which means that #oldwall will come out tonight talking about how great of a move this is. The reality is that they’re probably right. But I don’t care. Not really.
Here’s what I care about. I care about the fact that one person can wreck a company. But one person can’t build a great company. LULU is a GREAT brand, but is a very mediocre company. Current management is perfectly fine for an enterprise generating $2bn in revenue. Unfortunately LULU is at $2.6bn.
I care about the leverage McDonald will be given by the Board to restructure a semi-broken company, and then hire aggressively to build out its brand on a global scale across all genders, categories, and geographies such that generating $5bn in revenue will prove to be only an intermediate stopping point along the way. The tools are all there. That’s when people start talking about reaccelerated top line, 300-400bp of margin leverage, and $5+ in EPS power. If you’re buying the stock at $123, that’s what you’ve got to be playing for.
The LULU Board ain’t filled with dummies (anymore). They’re going to give McDonald the latitude to win. That tells me that we see SG&A and Capex go up in fairly short order before we see growth reaccelerate. Am I going to pull the plug on this name today just because it’s been a colossal long? No way. But we have to ask the critical questions about how the new team will a) change, and then b) give up near term margin and asset turns in order to make the company even greater than the brand, and ultimately make buying LULU at $123 a no-brainer.
Stay tuned…and don’t get too excited before we hear the guy answer the tough questions.
