Lululemon Founder Looking to Take Company Private

Chip Wilson spent years building lululemon athletica into a brand that grew large enough to be torn down -- now he wants to build it up again.

Jul 7, 2014 at 9:15AM

No one knows the ins and outs of the lululemon athletica (NASDAQ:LULU) brand or values better than founder and former CEO Chip Wilson. Yet Wilson has trampled over those same values a half-dozen times in a number of PR gaffs. It's a setup for a bad movie, in which only person who can save the failing community center is the exiled director who's fallen out with the public over his undesirable ways. Will he come back? Can he save the place? Will Debbie dance with Nathan at the big fundraiser?

Source: lululemon athletica.

The Wall Street Journal reported that Wilson has been nosing around at some private equity firms, looking for a hand in taking his old company back. Wilson still holds a 28% stake in the business, making him the largest individual shareholder. The company has long known that if Wilson decided to do something -- buy the business, sell all his shares, advocate for a change on the board, etc. -- that it would face a difficult fight. Now it looks like the fight is finally coming.

Wilson's ups and downs with Lululemon
"[Quite] frankly some women's bodies just actually don't work for [Lululemon yoga pants]." That's Wilson in his most recent misstep, telling Bloomberg last fall that some customers were having issues with their yoga pants because they had the wrong body. It's not a way to win friends, and I don't recommend it in any social setting.

Wilson is full of these sorts of tidbits, the kind that seem to come out through a faulty internal filter. The "faulty bodies" quote was the last straw for Lululemon's board. Wilson stepped down as chairman not long after the interview, adding to the series of bad news coming from the company.

Lululemon's fall
Wilson wasn't the reason Lululemon was down on its luck in the first place. The company took a hard hit when it was discovered that its product quality assurance system had fallen apart. Lululemon was selling overly sheer yoga pants; there were recalls and refunds, and the media had an absolute field day with the news. Competitors took the opportunity to step up with their own fashionable yogawear as Lululemon spiraled further downward.

The core of the problem wasn't even the product, it was the way the company interacted with the community in this case. Lululemon has long been a community-based business, and it's clear that Wilson understands that. Lululemon opened its first store in 2000 and in 2007 went public for $327 million. Wilson grew the business largely on the back of a community of yoga practitioners, one location at a time.

When the company hit its quality issues last year, it responded by effectively saying it was not at fault and that the "fabric involved ... met testing standards." At the time, Lululemon was sitting on a comparable-store sales increase of 11% for the quarter -- last quarter, retail comparable sales fell 4%.

Wilson's potential return
Even though Wilson "gets" the business in a way that others may not, that's not reason enough for him to come back. Current CEO Laurent Potdevin has a background with another strong community-driven business, TOMS Shoes. A move by Wilson at this point seems too early in Potdevin's tenure for the new CEO to have had sufficient time to make a change on his own. On the other hand, Wilson may not care about giving Potdevin a fair shot. He may simply be tired of not running the business the way he wants it run.

For investors, this could be the beginning of a long process that ends in frustration or a small payout. Lululemon's stock is down 34% over the last 12 months, and even a premium for the business seems unlikely to recoup that loss. Lululemon has a long way to go to get back to where it was, and even with his vision, Wilson seems unlikely to be the company's best option.

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Andrew Marder 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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