Investors Should Side With Chip Wilson

This founder has the right mindset in trying to push this company to be taken private.

Jul 20, 2014 at 10:00AM

Founders sometimes have volatile relationships with the companies they start. One of the most volatile in recent memory has been Men's Wearhouse and its founder George Zimmer. After a very public falling out, Zimmer was booted out of the company he founded. He was not too pleased and threatened to buy the company outright.

The war of words at Men's Wearhouse was enough to get management to pay attention. Management knew their jobs were on the line and that they needed to do something. As a result, Men's Wearhouse agreed to merge with its smaller rival, Jos. A. Bank Clothiers. Since the time George Zimmer left the company, shares are up over 50%.

The latest founder to stir the pot is Chip Wilson, the founder of Lululemon Athletica (NASDAQ:LULU)(NASDAQ:LULU). Shares are already roughly 20% off their 52 week lows, but if Men's Wearhouse is any indication, shares could run a lot further. Shares of lululemon are still down over 33% in the past year.

Founder uproar
Chip Wilson is looking at a number of options. He is in talks with Goldman Sachs about gaining more control of the company. His options include a proxy fight, or teaming up with a private equity firm for a buyout.

This sabre rattling from Chip Wilson should be enough to get lululemon management concerned. One of their options could be to find a buyer for the company. Analysts are speculating that Nike (NYSE:NKE) or VF Corp. (NYSE:VFC) could be interested in the apparel company as a nice addition to their product lines.

Who would buy lululemon
lululemon isn't a very small company, with an enterprise value of just around $5 billion, so it'll take a company with the balance sheet capacity to buy up the apparel maker. Also, ideally, the buyer will have a global presence. This would help lululemon expand into international markets faster, where 90% of its sales are in the U.S.

Like lululemon, Nike has also outlined its focus on the women's business. Thus, an acquisition of a company with the leading brand in women's yoga pants could accelerate the company's push to increase its sales to women. On the flip side, it has been committed to getting rid of non-core brands, which would mean Nike would go against this recent trend with a lululemon acquisition. A few of its notable divestitures over the last few years have been Starter, Umbro, and Cole Haan.

Then there's VF. This apparel company has a proven ability to buy and integrate brands. However, VF has focused on lower-margin businesses in the past, of which lululemon is not one. What's more is that VF already has a presence in the yoga pant business with the lucy brand. This brand was recently diffused into major retailers, including Dick's Sporting Goods and Dillard's.

The big hangup is that lululemon still trades at a premium compared to major peers. Thus, while it's cheap on a historical basis, its still one of the more expensive names in the industry. On the flip side, lululemon's business is high margin. The yoga pants company has a return on investment and profit margin that's above that of either Nike or VF. But the high margins don't negate the fact that lululemon's business has been in decline. Earnings grew at an annualized 50% over the last five years, but are only expected to grow earnings by 3% this year and then 15% next year -- the latter of which is in line with peers.

Bottom line
Shares of lululemon are trading at valuation levels not seen in half a decade. With that, it could be an attractive takeover target for one of the larger apparel retailers. Investing in a stock for buyout speculation alone is never a good idea, but for investors looking for a beaten-down athletic apparel company in turnaround mode, lululemon is worth a closer look.

Will you be buying Apple's next smart device at lululemon?
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!

Marshall Hargrave 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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