Lululemon’s Size Makes it an Unlikely Takeover Target

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lululemonVancouver–A leveraged buyout or takeover of Lululemon Athletica is unlikely, analysts believe, due to its size and its very high and declining margins.

According to the Wall Street Journal, founder Dennis “Chip” Wilson is understood to have hired Goldman Sachs in a bid to shake up the board of directors, and is considering a potential proxy fight or joining a private equity firm for a buyout. Nike and Adidas have also been suggested as potential suitors for the company.

Cowen & Co analysts, however, believe that any of these scenarios are unlikely due to a number of factors.

Margins Contract

“We want to be blunt here—we think a deal involving Lululemon founder Chip Wilson is unlikely. His recent track record of provocative remarks makes a deal that would involve raising billions of dollars unlikely. Funders tend to be conservative individuals working at conservative firms, and, especially after the recent experience of some investment firms with retail founders (cf. American Apparel), we think that funders are likely to shy away from voluble founders.”

They also noted that, as it stands now, Lululemon does not have the hallmarks of a typical leveraged buyout candidate.

“Generally, the typical private equity strategy within retail/consumer looks for candidates with a tarnished but viable brand, untapped distribution opportunities and depressed margins that it can restructure towards. While there has been considerable private equity interest in health and wellness concepts, the deals are usually small.”

The third option, a potential corporate acquisition by a company like Nike, Adidas or Under Armour, they also believe to be unlikely.

“We place the probability of either Nike or Under Armour buying Lululemon as extremely low, as both companies believe, in our opinion correctly, that they can penetrate the upper-end women’s athletic apparel business on their own. We do not follow Adidas, but are under the distinct impression that the company’s shareholders would not welcome an acquisition of this nature or magnitude.”

The analysts also pointed to Lululemon’s margins, which they noted are poised to contract not expand.

The company reiterated its long-term goals of a mid-50% gross margin and a mid-20% operating margin on its fourth-quarter earnings call.

“We think these targets, which are very high by any standard, may be challenging to achieve due to the increasingly crowded field of activewear manufacturers. Rising competition may act as a deflationary pressure on Lululemon’s margins going forward even with future supply chain and expense optimization benefits.”

The analysts also believe Lululemon’s board is likely to want to give the company’s recently hired CEO, Laurent Potdevin, and chief product officer, Tara Poseley, time to implement their strategies.

“We think they may not agree to a deal unless it is at a very high premium.”

The retailer was recently forced to hit back at claims by Chip Wilson that the company’s board is “heavily weighted towards short-term results at the expense of product, culture and brand and longer-term corporate goals.”


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