Lululemon and Founder Chip Wilson Agree to End Public Feud, for Now. Is It Safe to Buy the Stock Again?
Key Points
Chip Wilson, the founder of Lululemon, has been highly critical of the company in the past.
Wilson has agreed to remain quiet for 18 months in exchange for a couple of additions to the board.
The company has been struggling as its growth was modest last year and its earnings fell by 13%.
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Lululemon Athletica (NASDAQ: LULU) and its founder, Chip Wilson, haven't seen eye to eye on the company's path in recent years. While Wilson is no longer running the company, he's been fairly vocal about his displeasure with Lululemon's direction.
Recently, however, he reached an agreement with the company, which involves giving the former founder board picks in exchange for Wilson remaining quiet and allowing the new CEO to navigate the company's path forward, without fear of highly public criticism. Does this news make Lululemon a better stock to buy right now?
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Wilson isn't the reason for the stock's struggles
Wilson publicly criticizing the company may not have helped Lululemon win over the trust of investors recently, but it surely wasn't the main reason the stock has struggled. Its problems are a whole lot simpler and deeper than that: its growth has nearly dried up. In its most recent fiscal year, which ended on Feb. 1, the apparel company reported revenue of $11.1 billion, which was an increase of just 5% from the previous year, a far slower growth rate than what it has achieved in the past.
A more troubling issue was its worsening bottom line. The company's net income for the past fiscal year was down 13%, totaling $1.6 billion. With a performance such as this, and the outlook potentially only looking worse due to higher inflation and challenging economic conditions, investors may have simply been anticipating greater problems and adversity ahead for Lululemon's stock.
No simple fix is likely coming for Lululemon's stock
In April, Lululemon announced that Heidi O'Neill, who previously worked at Nike, would be taking over as the company's CEO in September. I wouldn't, however, be overly optimistic about the business being able to turn things around easily, even under the new leadership.
Convincing consumers to buy Lululemon's high-priced apparel at a time when many people are struggling to pay bills simply won't be easy, regardless of what kind of new products it's able to come out with. The company has a tall task ahead, and many investors don't want to take a chance on a business that's already been struggling to grow in recent years.
In the past 12 months, the stock has lost 58% of its value, and while it may appear to be a bargain buy, it also comes with significant risk. While the drama between the founder and the company may be over for the time being, there could still be much more drama to play out for the stock. And unless you're willing to hold on amid all the uncertainty, you may be better off just taking a wait-and-see approach with Lululemon.
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David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lululemon Athletica Inc. and Nike. The Motley Fool has a disclosure policy.
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