What's Next for lululemon athletica?

Despite numerous problems, lululemon now appears to be an attractive investment as the company faces reduced expectations and remains a viable takeover candidate.

Jul 1, 2014 at 6:00PM

By almost all accounts, 2013 was a terrible year for yoga apparel retailer lululemon athletica (NASDAQ:LULU) Not only was the company faced growing consumer backlash as a result of a massive product recall but subsequent public relations blunders added to the company's woes. Investors hoping that 2014 would be better for lululemon have so far been let down, as the company continues to appear directionless, and shares remain at depressed levels.

However, there are now several reasons to consider the retailer as a long-term investment, not the least of which is the company's enticing takeover prospects.

Images

Source: Company Facebook

Takeover candidate?
In a recent article, I mentioned VF Corporation (NYSE:VFC) as a possible bidder for lululemon. The large-cap retailer has a successful history of acquiring undervalued brands with strong growth potential. In the past, VF has purchased names like The North Face and Timberland, and used its powerful industry positioning to increase brand awareness and grow revenues.

Looking at VF's extensive brand portfolio, the company doesn't currently have significant exposure to the large yoga market. As a popular and growing brand, lululemon would fit in nicely with VF's other premium lifestyle brands, and fill an existing product void.

Since VF derives almost 70% of its revenues from its signature Outdoor & Action Sports category, the segment remains a priority for VF management going forward. Lululemon would be a great way for VF to extend growth in the segment. According to Yahoo! Finance, analysts project lululemon to grow revenue 11.7% in the current year, which compares favorably to VF's projected revenue growth of 8%.

Lack of leadership
Part of the reason lululemon has struggled in recent years is the lack of an effective management team. Just months after the company's massive product recall in 2013, Christine Day stepped down as CEO, ending a successful five-and-a-half year run in which the company achieved almost cult-like status among yoga practitioners. Laurent Potdevin then stepped in as CEO for lululemon in December of last year, but has faced numerous criticisms, including a lack of clarity regarding the company's future growth goals.

Additionally, founder Chip Wilson, who owns 28% of company shares and who was ousted as chairman of the board in December for making disparaging remarks about the company's clientele, is fighting for control of lululemon. Recent reports indicate that Wilson may be joining with Goldman Sachs and attempting to shake up the company's board and win more seats, which would give him more influence over the company. Also a possibility is that Wilson will partner with a private equity firm in an effort to take lululemon private.

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lululemon: a downward dog no longer? Source: Company Facebook.

What's next for investors?
While the next part of the lululemon story cannot be known by investors at the moment, there appears to be very little downside risk to shares of lululemon at current levels. In the company's latest earnings call, management lowered guidance, so growth expectations are already very low 

Additionally, with such a large stake in the company, Mr. Wilson has a major incentive to see lululemon do well. Whether it's through a private acquisition or a significant board restructuring, Mr. Wilson's efforts should prove beneficial to investors in the long term.

Finally, the possibility remains that an acquisition-friendly retail company like VF does decide to acquire lululemon. The pairing would make sense, because lululemon currently lacks what VF has in spades -- effective and proven leadership. No matter which scenario plays out, though, lululemon is most likely a solid addition to portfolios with the ability to handle some risk and volatility.

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Philip Saglimbeni has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica. 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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