5 Challenges for Lululemon's New CEO

Lululemon athletica (NASDAQ: LULU  ) announced it finally found its new CEO in Laurent Potdevin, most recently President at TOMS and before that CEO at Burton Snowboards, starting his career at Louis Vuitton. Starting in January, the challenges begin: shoring up an eroding competitive moat, growing internationally, fixing the supply chain issues, fitting into an unconventional corporate culture, and most importantly, standing up to founder and largest individual  investor Chip Wilson, who is keeping a seat on the Board.

Lululemon just reported third quarter earnings on December 12 and while it beat on EPS and met revenue expectations, guidance going forward was pessimistic for this growth company. This took the stock down by 10% plus. To recap Lululemon's troubles this year, founder Chip Wilson made numerous PR gaffes in the last few months and quality issues due to a straitened supply chain led to a recall of too sheer yoga pants costing the company millions.

Potedevin comes in with his work cut out for him. Bloomberg noted he has never run a major retail chain so is he up to the task? And more importantly, just who is this guy?

Will he fit in?
In June Lululemon ran a tongue-in-cheek ad  on its website for the new CEO position current CEO Christine Day is leaving.

" CEO description highlights include:

Your go-to party trick is your dead-on impression of the yogi in "Sh(asterisk)T Yogis Say"

—You voted for Pedro

—You have Chip Wilson, Bill Clinton, Ellen DeGeneres and Oprah Winfrey on speed dial

—You actively live and breathe the lululemon culture-on Friday afternoons you hit up wheatgrass and tequila shots (it's called work/life balance)

—You use your third eye to channel innovation"

Although Potdevin received his MBA from the prestigious Paris business school École Supérieure des Sciences Économiques et Commerciales and started as manager at tony Louis Vuitton he has since worked as CEO at Burton Snowboard and President at TOMS, a shoe company best known for its charitable policy of one pair shoes donated to poor children for every pair purchased.

source:TOMS YouTube video

At Tom's, an unconventional work culture is best exemplified by a video the company made on a team-building family trip. Of course, it wasn't all fun and games at TOMS, Potdevin helped grow the brand internationally with estimated revenues of $300 million in 2013 from 2008 when it had $500,000 in revenues and 5 employees.  My take: Potdevin should fit in just fine. Hey, he's already made his first Lululemon videos (here and here).

source:Lululemon YouTube video

Supply chain issues
Lululemon's dependence on a single supplier of its trademark Luon fabric for its most popular yoga pants led to the disastrous recall last spring. At the second quarter earnings reports then CEO Day reported the company was expanding its supply chain and had hired new managers. 

Potdevin has had experience with supply chain issues at TOMS. TOMS is making shoes in several locations now: Ethiopia, China and soon Kenya, Haiti, and India. Potdevin told Fast Company last summer, "Toms would not be what it is today without China. We wouldn't have the resources we have now. It has been the easiest, most cost-effective place to make shoes." Of the new venues he added,"Getting a factory up and running, retention, training, finding local management--every aspect is more difficult in a place like Haiti."

Supply chain issues should recede under Potdevin's command. Analysts like Jefferies' Randall Konik are optimistic, "Given the various product and supply chain hiccups the company has undergone this past year, we believe Mr. Laurent will bring a fresh start and new perspective at this retailer."

International growth
Potdevin helped TOMS grow to an international brand with pop-up shops in Hong Kong. Since 2012 alone, he has expanded TOMS footprint by 12 countries.   

International growth is an important goal for Lululemon. CFO John Currie said on the call, "During the quarter, we opened 17 net new lululemon stores in the U.S., two in Australia/New Zealand, and two ivivva stores. We ended the quarter with 247 total stores versus 201 a year ago. There are 184 stores in our comp base, 38 of those in Canada, 117 in the United States, 21 in Australia and New Zealand, and 8 ivivva ."

The competitive landscape - Gap and Under Armour
Laurent himself acknowledges the competitive challenge, telling the Associated Press, "Lululemon has created an amazing market. Every time, you do that, the competitive landscape gets more intense."

Its most direct and much larger rival Gap (NYSE: GPS  )   not only offers the Lululemon like sense of community at its Athleta athletic wear retail stores with free classes like Lululemon and offers cheaper yoga wear at Old Navy. Another strong competitor is Under Armour (NYSE: UA  ) , with an expanding yoga line, blatantly advertising its pants never pill, another quality issue that Lululemon has faced.

Potdevin  met competition head on  in his tenure at TOMS which saw Skechers introduce BOBS, similar to TOMS signature alpargata. Potdevin also helped TOMS bring out a new line of sunglasses, competing against Luxottica and Warby Parker.

With his Burton Snowboard experience Potdevin has the know how to grow the Lululemon brand with men and beyond yogawear expanding its swim, bike, and run apparel lines.

Still, this is a difficult challenge Potdevin faces as upstarts like Sweaty Betty and large retailers like JW Nordstrom and Limited Brands looking to take share.

Dealing with an influential founder
Although founder Chip Wilson resigned as Chairman of the Board, he still wields some influence. There was also speculation Wilson and CEO Day clashed personality-wise and Wilson's reputation even driving off potential CEO replacements.  

Potdevin has experience dealing with strong-minded founders. At TOMS the much younger Blake Mycoskie kept him on a short leash for several months before letting him run. Potdevin worked for fifteen years with Jake Burton, Burton Snowboard's founder.

Let's sew it up
Of all the candidates Lululemon didn't scare away Potdevin meets all the criteria for meeting these five challenges. He has the potential to return Lululemon to the fast growing company it was with revenue growth dropping from 37% last year to an average 21.5% in the first half. When he takes over the yoga mat in January he has his work cut out for him.

 

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