Acquisition rumors about Lululemon athletica (LULU 3.02%) were circulating again last week after an article ran in the New York Post that Under Armour (UA 0.31%) may be considering buying out its smaller rival. Bloomberg Gadfly fueled the fire as well, arguing separately that buying Lululemon would be a better and cheaper move for Nike (NKE 0.24%) than spending $12 billion on buybacks as it has proposed.
All companies involved denied any merger talks, and the stock came back down on Monday following a downgrade, but arguments for a Lululemon takeover have been persistent for a couple years now. The stock is down 40% from its all-time high in 2013, leading some to see it as a bargain. Several times since, analysts have suggested that a combination with VF Corp. (VFC 3.36%), the parent of brands like Wrangler and Timberland, would make the most sense, but that has yet to be borne out.
The pundits seem to be overlooking some key facts about Lululemon that make it unlikely to be acquired, however.
Culture club
Though a tie-up between Lululemon and Under Armour might seem wise on the surface, as both companies are fast-growing upstarts with strengths in each gender, the culture gap between the two is vast: Under Armour skews male-centric, while Lululemon is the opposite. Some have characterized the culture at Under Armour as "Work hard, play hard," while Lululemon's might be better described as "Do what inspires you, namaste."
Under Armour evolved out of football, while Lululemon got its start with yoga. The two athletic pursuits couldn't be more different. Culture at Lululemon is a big draw for the store-level employees it calls educators. They receive reimbursements for all yoga classes they attend, and are asked to write down goals for the next several years. Many have called the culture cult-like, a quality that would make it a poor fit if absorbed into a larger brand; a cultural shift could drive many employees away.
Not necessarily a value play
Though Lululemon's market cap has fallen from its earlier heights, the stock isn't exactly cheap with a P/E of 26, and profit growth has slowed dramatically. At a market value near $7 billion, the cost to take over the company would be prohibitive for Under Armour, which has just $3 billion in assets on its balance sheet. An acquisition would mean either taking on a tremendous debt burden, diluting current shareholders by more than a third, or some combination of the two. While Under Armour has been willing to purhcase other companies, most of its acquisitions have been in the digital space with an eye to advancing its wearables division, taking over companies like MapMyFitness and Endomondo.
Nike may be big enough to absorb Luluemon, but the Swoosh has tended to prefer organic growth to bolt-on acquisitions. The world's largest brand has made mistakes before, such as its five-year ownership of soccer brand Umbro, which resulted in a loss of $357 million when it sold Umbro in 2012. Similarly, though it made a gain of nearly $500 million on Cole Haan, the shoe brand it owned from 1988 to 2012, even that can be seen as a misguided attempt to branch out of athletic footwear. Those recent divestitures are also reflective of CEO Mark Parker's desire to streamline the business.
Today, only two brands -- Converse and Hurley -- came to Nike through acquisitions, and the most expensive of those was Converse at $305 million. Considering the company's history with acquisitions and Parker's strategy, a splurge on Lululemon seems highly unlikely.
Just as important, both Under Armour and Nike have invested heavily in women's lines, and are seeing significant growth in that segment. Buying Lululemon would only undermine those efforts.
If any of Lululemon's suitors is a logical fit, it would be VF Corp, the company that's made a clothing empire out of acquiring underperforming brands and leveraging its size for cheap materials and an efficient supply chain. Its most expensive acquisition to date was Timberland in 2011 for $2.3 billion, considerably less than Lululemon's value today, and Lululemon's use of technical, proprietary fabrics may make it a poor fit for VF's supply chain, which tends to focus on denim and outdoorwear.
At this point, Lululemon is too big and too expensive to warrant an acquisition. The women's activewear field is getting crowded, as companies from Gap to Nordstrom have also gotten in on the mix. Competitors are aware of Luluemon's brand strength, but its deteriorating profit margins are a sign that launching their own apparel brands, instead of acquiring Lululemon, was the right move.
There's no white knight waiting in the wings for Lululemon. The company and its investors need to breath deep and find salvation within.
