lululemon athletica Caught Up in Acquisition Rumors

Rumors swirled this week that Lululemon might be on its way to the auction block. What does it mean for investors?

Jun 20, 2014 at 10:45AM

Since the beginning of the year, lululemon athletica's (NASDAQ:LULU) stock has lost 31% of its value. The once high-flying yoga-wear retailer has been crushed by product and leadership concerns, including the recent loss of its CFO. With a market cap of just over $7 billion, the inevitable talk of an acquisition has begun in earnest, and yesterday the backroom chatter spilled over into the public eye.

A Bloomberg article theorized that Lululemon's recent drops have made it a much more attractive target. The report floated VF Corp. (NYSE:VFC) and Nike (NYSE:NKE) as potential suitors, as both companies are looking to expand their workout gear-as-daywear lines.

Is the speculation warranted, or is this just more wishful thinking designed to "prop up positive outlooks for the stock," as one analyst put it.

Lululemon's value and structure
The two most important features of Lululemon that any acquirer must consider are its distribution method and its customer engagement strategy. First of all, Lululemon is a retailer at heart. As Sterne Agee analyst Sam Poser pointed out, the potential suitors are more suited to wholesale products. Second, Lululemon drives sales through community engagement and relationship building, with its local ambassadors and classes. Nike and VF Corp., by contrast, use a more traditional engagement method -- they sell things people want and hire big-name athletes to advertise those products.

On the surface, the fit isn't great. It seems like the combination of either Nike or VF Corp. with Lululemon would be like putting monster truck tires on a 1964 Studebaker Wagonaire. But looking a little deeper, there are at least a few overlapping points.

For Nike, Lululemon offers an excellent international opportunity. Lululemon has been almost entirely focused on North American sales, with just 6% of revenue produced outside the continent in the last quarter. Nike, on the other hand, is a global champion and could pretty easily bring Lululemon out into the world.

VF Corp. has the benefit of being a fashion powerhouse. Its North Face, Vans, and Timberland brands have all put up solid growth, with North Face direct sales increasing by close to 30% last quarter. By contrast, Lululemon has stalled out: comparable sales grew by just 1% in the first quarter.

Carts, horses, and their relative locations
Before getting investor hopes too high, it's important to remember that the community aspect of Lululemon is defining, and that neither Nike nor VF Corp. have much experience in that department. Nike has introduced running clubs at some of its locations, but those are still in their early stages. VF Corp. has almost no experience with leading a community. It feels like Lululemon would have to fundamentally change in order to fit into either lineup.

The bottom line is that Lululemon, even with all its problems and recent drops, is unlikely to go anywhere anytime soon. Even if Nike or VF Corp. wanted to buy the company, they'd have to wrangle with founder, former CEO, 27% owner, and loose cannon Chip Wilson, who would probably not be tempted by either company. Instead, Lululemon investors are going to have to hold out hope that the new management team can turn the business around -- though that should not be expected soon.

A better bet for growth
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica and Nike. The Motley Fool owns shares of Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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