Lululemon in Danger After CEO Leaves

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

The sudden departure of a CEO almost always hurts the stock in the short term. This is happening with Lululemon Athletica (NASDAQ: LULU). At the recent earnings report, Christine Day announced her plans to step down after five and half years of being Lululemon’s CEO.

At the same time, the results of the company look solid. The company has earned $0.32 per share, beating analysts’ estimates. Net quarterly revenue increased 21% to $345.8 million in comparison with the first quarter of fiscal 2012. Comparable stores sales for the first quarter increased by 7%.

If put on the scales, which one is more important – the departure of CEO or good quarterly results?

Growth prospects

Lululemon specializes in the production and selling of athletic apparel, mostly for yoga, running and fitness. The company has been growing fast. Lululemon has almost doubled its revenue during the last two years. Its competitors, like Nike (NYSE: NKE) and Under Armour (NYSE: UA) were not able to show such growth rates. Nike’s revenue rose 27% in two years, while Under Armour managed to grow its revenue by 72.5%.

If Lululemon wants to see its stock rising again, it needs growth. It is difficult to gain momentum in the U.S. and Canada, where the market is established. Lululemon has stated that it has just received licenses in China, which allows the company to proceed with its showroom strategy there. The wealth of Chinese citizens is growing every year, which makes China a very attractive entry point for producers of consumer goods. In Europe, Lululemon is focusing on stronger countries like U.K. and Germany, opening showrooms there.

Strange moment to leave

Here comes the reason why Lululemon lost 17.5% after it announced that Christine Day would be leaving the company. Lululemon is about to become a really global player, with serious expansion out of the North America. It is confusing to know that CEO voluntarily departs at such an important period of the company’s life.

It is even more stunning as Lululemon starts expanding its product offerings beyond yoga-oriented ones. Sure, the company has had them before, but it has recently focused more attention on men’s, golf, swim and tennis lines.

When Lululemon was more of a niche yoga player, the company achieved tremendous success. There was not much competition in the field, although Under Armour, for example, offers yoga apparel. By expanding the product line, Lululemon is expanding its competition.

Moving east

Other apparel companies should probably be happy that a rising competitor has lost its leadership for a while.

Nike, up 21% this year, has been successful in dealing with numerous competitors in its different product categories and geographies. Nike’s stronghold is North America region, which grew 18% in the last quarter.

Nike is struggling to get its China business moving too. China is extremely attractive, and Nike thinks the country is an important part of its long-term growth plans.

Under Armour, up 23% this year, considers Asia important, too. The company states that it sees tremendous opportunities for the brand outside of the United States. You’ll see more and more companies rush to get the growing Asian customer base. The ones who would manage to establish their names faster would be the winners.

So, Lululemon loses its CEO when it is entering new markets and its competitors are battling for the same markets too. How does it affect the bottom line?

Bottom line

Christine Day would stay as a CEO until the new one is found and she would ensure a smooth transition. Lululemon has built a strategy, and, at least at the short term, the momentum would continue, with Christine, or without her. The future of the company’s growth woud depend on its ability to conquer foreign markets.

Right now, the stock is trading at a 26.40 forward Price-Earnings (P/E) multiple, while Nike is trading at a 20.31 forward P/E and Under Armour is trading at a 32.57 forward P/E. Nike is the only company of these three that pays a dividend, yielding 1.35%.The departure of CEO during expanding both in product categories and geographically would certainly hurt Lululemon. 

Among these three companies, Nike looks like the best place to put your money. You get the cheapest valuation plus the dividend. Nike is the most diversified company, which makes products in different categories and sells them all over the world. Nike's marketing machine would help the company further expand its presence, while making it harder for competition to battle for their piece of the pie. In addition to that, Nike is the strongest player in the key North American market. 

Lululemon's ship is about to lose is captain. No wonder investors are worried about that. I would like to see the next quarterly results before considering buying the stock.

Vladimir Zernov has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica, Nike, and Under Armour. The Motley Fool owns shares of Nike and Under Armour. 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!

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