Lululemon announced the end of a seven-year-long tenure Thursday with the exit of CEO Calvin McDonald. Going forward, the company is looking for a CEO with experience in growth and transformation, CFO Meghan Frank, who will take on an interim co-CEO role in January, said on an earnings call that day.
The company, which reported earnings on Thursday, saw revenue grow 7% to $2.6 billion, but sales in the Americas declined 2% in the period. Comps increased 1% overall but were down 5% in the Americas.
Founder Chip Wilson, who has been vocal in recent months about his criticism of Lululemon, weighed in on the executive shift on Friday, saying he was “deeply concerned” that the board appeared not to have a planned out succession process.
"As I have communicated to members of the company publicly and privately, Lululemon needs revitalization and an infusion of new skills to get back to being a product-first company that creates real, long-term shareholder value,” Wilson said in a statement, alleging that the board and McDonald have overseen years of deterioration at the athletics brand.
He added that there are “several qualified CEO candidates” who could build on the brand’s legacy and urged the board to consult with those with deep knowledge of the company as its CEO search commences.
“In my view, the Board has failed to properly hold management accountable to deliver product innovation and instead has led with complacency,” Wilson said. “The erosion of premium brand value in the company's core markets demonstrates that the Board does not understand its target customers anymore or what will drive shareholder value at Lululemon over the long term.”
Lululemon did not immediately respond to questions regarding Wilson’s comments.
Some of Wilson’s criticisms are valid — Lululemon’s management in September announced it would overhaul its product design and development processes to combat a series of product missteps. McDonald at the time acknowledged that Lululemon had become “too predictable” and failed to create new trends, and that discussion continued in the current quarter.
On his last call as CEO, McDonald said the brand was focused on product creation and that he had been working with Creative Director Jonathan Cheung on a more compelling product pipeline. The first results of that work will hit in the spring, McDonald said, and the brand is on track to have 35% new style penetration by then as well.
“Our teams have been in the work to reenergize our product engine, bring a new energy into our assortment and increase our speed and agility,” Frank said. “Looking forward and under the direction of our design team, we will be updating several of our key franchises while also maintaining a strong pipeline of new innovations across our performance offering.”
Innovation will hit categories including run, train, yoga, golf and tennis, beginning with train. The company has a new fabric designed for weight training, McDonald said, and plans to innovate in its leggings business and across tops.
"Lululemon is now a brand without a captain at the very time when it needs a strong sense of direction.”
Neil Saunders
GlobalData Managing Director
Overall, analysts seem to agree it’s time for a leadership change, though some of the brand’s problems are larger than an executive. Guggenheim analysts led by Simeon Siegel noted that the CEO shift gives Lululemon some breathing room for a reset, but noted concern over “potential domestic brand saturation.”
“Reinvigorating growth for a strong but large brand is easier said than done,” the analysts wrote.
A leadership change right now also muddies the waters on the brand’s turnaround, some analysts noted. Needham analyst Tom Nikic said the company’s outlook has “likely become cloudier” due to McDonald’s departure, a sentiment echoed by GlobalData Managing Director Neil Saunders, who called the CEO shift “sudden and hasty.”
“While the results themselves do not warrant a resignation, the somewhat muddled strategy has caused a lot of noise as Lululemon’s founder has become an outspoken critic of the brand’s direction. This made the position of Calvin McDonald difficult and is one of the reasons for his exit,” Saunders said. “That said, Lululemon is now a brand without a captain at the very time when it needs a strong sense of direction.”
The retailer’s path forward also comes after a decade of largely enormous success. Wells Fargo analysts noted Lululemon’s performance in North America has been “one of the strongest and most consistent” in the softlines space over the past 10 years. Those analysts also said McDonald was “very successful for many years” and helped create the strong U.S. athleisure market. The competitive environment has gotten more intense, though, and a fresh perspective is a positive for the brand.
“The brand is in unchartered waters today, unable to comp positive in 12+ months with the US market negative and struggling due to a lack of innovation on core product and increasing competition from new entrants (namely Alo Yoga and Vuori, as well as others),” Wells Fargo wrote.
While Lululemon had a successful Thanksgiving period, McDonald said Thursday that trends have slowed since then. The retailer is projecting a net sales decline of 1% to 3% in Q4, though sales would be up 2% to 4% excluding the extra week last year. For the full year, Lululemon expects net revenue will grow 4% to roughly $11 billion.
Jefferies analysts warned in emailed comments that the brand’s fundamentals will continue to deteriorate, with Lululemon losing more share and margin erosion continuing to make a mark on the business.
“The reality is that under Calvin’s leadership, [Lululemon] lost its way,” Jefferies analysts led by Randal Konik said. “The brand’s core identity has been diluted by inconsistent design + expansion into non-core categories. The result: alienation of loyal customers, mounting competitive pressures, and a biz in clear decline. The board’s decision to move on is overdue and, in our view, the most constructive development for shareholders in years.”
