The Secret Club No CEO Wants to Join

AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Deep in the bowels of the throbbing metropolis there's a little hideaway, where one pushes a slot and whispers a password...golden parachute. On odd days it's...exit package. Inside some of the wealthiest and least missed CEOs gather for their overflowing champers (champagne) and sweetmeats.

On the mahogany paneled walls loom the portraits of some of the charter members inducted this last year: Andrew Mason of Groupon, Aubrey McClendon of Chesapeake Energy, Ron Johnson of J.C. Penney, and the newest member, Christine Day of Lululemon Athletica (NASDAQ: LULU), all of whom left willingly or unwillingly under a cloud.

No matter the reason for the invitation to join, whether it's mismanagement like Johnson, conflicts of interest (McClendon), inability to create a moat (Mason), or a disregard for the customer (Day), each former leader gets to chat about how nice it is to spend more time with the family. There's always room for one more at this very exclusive club of wealth destroyers; several gilded picture frames hang empty for new members.

This is truly the club that personifies the Groucho Marx aphorism,"I would never join a club that would have me as a member."

All hail our newest member

Some members get in by the skin of their teeth like Day of Lululemon who could have waited out the storm over the booty-revealing luon yoga pants. She is probably the least deserving member as her resignation sank the stock 18%. Generally when members leave their companies the stock shoots up in a relief rally.

Lululemon's stock had soared under her leadership with a scarce inventory marketing strategy and a culture attracting incredibly loyal customers. But a refusal to address a well known quality control issue of such an embarrassing nature was a pivotal mistake for such a battleground momentum stock. 

Lululemon down 18% actually looks better now that the "sheer in the rear" pants debacle is behind them (I apologize for that pun). What I originally liked about the company in so many posts were its community involvement, its research and development into new performance fabrics, the aforementioned insanely loyal customers, and its strong social and web presence. These all loom larger as reasons to get back in, especially after the company actually beat on both top and bottom line when it reported on June 10.

Others are more deserving of the membership, like Ron Johnson, who not only was overpaid but lost millions in market cap, profits and dividends for shareholders of J.C. Penney. The real test of caliber for the club is how well the stock rebounds after the CEO joins this club. J.C. Penney, Chesapeake, and Groupon all surged after these CEOs left.

Not just anybody can join; you'll never see Bob Iger of Walt Disney or Warren Buffett of Berkshire Hathaway darken these doors. They care too much for their shareholders. But there are a few promising candidates.

Who's next to learn the secret handshake?

One is Michael Jeffries of apparel retailer Abercrombie & Fitch (NYSE: ANF) who  fomented a PR nightmare for the company with his "cool kid" exclusionary sizing controversy. Since the furor, the company has tried to assuage angry teens and customers with apologies, scholarships, and an anti-bullying campaign. Jeffries is also, to put it baldly, kind of a weird dude, currently being sued by a pilot on his private plane flight crew for age discrimination. The suit brought to light a bizarre list of rules for Jeffries' flight crew and more unflattering headlines.

Jeffries won't leave the company, and his $100 million golden parachute is so pricey the company can't afford to make him go; it has also likely deterred private equity suitors. He was one of the most highly paid CEOs with one of the worst performance records.

The company reported disappointing numbers in May with same store sales declining by double digits as well as a reported loss of $0.09 earnings per share and shrinking margins. Predictably, the stock sold off 10%.

And there's Marc Pincus, CEO of Zynga (NASDAQ: ZNGA), the online gaming company, who may get blackballed from the club if online real money gaming takes hold. The company has launched it to a limited extent in the UK, but on the last call this was said not to be material to earnings. If online real money gambling isn't a big hit, he's a real contender for membership; his stock has dropped from an all time high at $15 in the spring of 2012 to struggling to stay above $3.

It didn't help that Pincus overpaid for a one-trick pony gaming company, $210 million for OMGPop and its Draw Something game that immediately started losing players, and dropped $228 million on the San Francisco headquarters. It didn't help stockholder confidence that Pincus sold so many shares almost immediately on the lockup expiration. Although perks were Googleworthy major talent has left Zynga in droves, and the company has recently had to lay off 520 workers; that's 18% of its workforce.

Listed repeatedly as one of the worst CEO's of 2012, Pincus looks like he's trying not to reprise that role for 2013 with this last ditch effort to cut expenses by cutting staff, especially after disappointing guidance in April. Also, Pincus is betting the Farmville2 as the best last hope for a hit game. Still, fingers crossed, Pincus may yet get to settle in the soft-as-butter leather club chairs.

The meeting is dismissed

Day needn't have joined the club, but the pants fiasco required a scapegoat. Lululemon at these prices is a better buy than before. However, waiting to see who the new CEO is might be wise. As for Zynga, I see the painting on the wall for Pincus. As much as the club would welcome Jeffries with open arms that golden parachute is going to keep him off the roster. Meanwhile, there are much better companies than Abercrombie and Zynga, companies whose CEOs will never be invited to this club.

Lululemon has the potential to grow its sales by 10 times if it can penetrate its other markets like it has in Canada, but the competitive landscape is starting to increase. Can Lululemon fight off larger retailers and ultimately deliver huge profits for savvy investors? The Motley Fool answers these questions and more in its most in-depth Lululemon research available. Thousands have already claimed their own premium ticker coverage; gain instant access to your own by clicking here now.


AnnaLisa Kraft 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus