lululemon athletica Caught Up in Acquisition Rumors

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.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 20, 2014, at 5:01 PM, Intidesi wrote:

    Will see...

  • Report this Comment On June 20, 2014, at 8:44 PM, lsmithcom wrote:

    Your article is really pretty poorly thought out. The very reason that Lulu is attractive is that they have nailed the community engagement model, which Nike and VF would be very interested in learning from lulu. Community engagement is a much more advanced marketing model and is well aligned with the digital marketing models of the future. Any acquirer would not try to change the community engagement model, they would simply need to help take it global. The real question is whether Chip would ever agree to a sale. I doubt it. He is the likely candidate to stir things up, most likely with a leveraged buy-out to take it private. He said that voting against the directors was just the start of what he planned to do to make sure lulu reaches it's full potential. He is an action-type of guy and not likely to sit on his hands.

  • Report this Comment On June 21, 2014, at 10:32 AM, TMFRedRam wrote:

    Thanks for reading.

    I think you've definitely got a point about wanting to learn form the community model that Lululemon has, but I think that it wouldn't require buying the entire company.

    if Nike or Under Armour or VFC want to learn how Lululemon does it, I feel like they would just make some key hires from the Lululemon line-up. That's all knowledge that a handful of people could possess, not something that requires a $7 billion investment.

    I agree with your point about The Chipster. He's unlikely to sit idly by as his brain child gets sucked up into another business.

    Cheers,

    Andrew

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