Who will fill the CEO pants at Lululemon?
The surprise departure of Christine Day has the industry buzzing.
The surprise departure of Lululemon's (LULU) CEO Christine Day on Monday has the industry buzzing. But who will take the reins of the Vancouver-based athletic apparel company?
Lululemon's first order of business is, of course, determining what kind of leader it needs. The company is looking to expand its global presence, specifically in Asia.
But the challenge for Lululemon is so much more than just filling the position with any high-level executive.
"Investors are going to expect the high level of growth to continue," says Marshal Cohen, chief industry analyst at NPD.
In Lululemon's case, this means that the new CEO must have a good understanding of a "lifestyle" company, but also know how to create product and have financial acuity, he says.
Lululemon is in a competitive arena "where price makes a difference," Cohen says. The new leader will have to reinforce that Lululemon apparel is worth the money it costs. "It's going to make their product really [have to] earn those prices, which means [the leader must be] creative in how to deliver the same for less or deliver even more so that you can stay at those higher prices."
"This is not going to be easy to find," Cohen says. The new CEO must be "someone that comes from wide-spectrum business" with great leadership skills, he adds, noting that the perfect candidate will not be cheap.
The resignation of Lululemon's CEO was announced at the same time as its first-quarter results on Monday. The numbers beat analysts' expectations, despite the Luon pants fiasco in March. Net income rose 1.5% to $47.3 million, or 32 cents a share, from a year earlier.
"The plans have been laid for the next five years and a vision for the next 10 years," Day, 51, said in a statement on Monday. "I feel that the timing is now right to bring in the next CEO candidate who will drive that 10-year vision."
Still, the news spooked investors. The retailer's shares fell 17.5% on Tuesday to $67.85. Sam Poser, equity analyst at Sterne Agee, downgraded Lululemon to 'neutral' from 'buy' and cut his 12-month price target to $75 from $90.
The stock fell an additional 6% on Wednesday to $63.78, though it is recovering somewhat Thursday.
While it would behoove Lululemon to consider internal and external candidates, observers say Lululemon's new chief executive is likely to come from left field. Day herself was a 20-year veteran at Starbucks (SBUX) before joining the company in January 2008.
"You could compare this a little bit to what [Estee Lauder (EL)] did," says retail consultant Michael Appel, referring to 2008, when the cosmetics company hired Procter & Gamble (PG) veteran Fabrizio Freda to succeed William Lauder, then CEO and grandson to the company's founder.
Estee Lauder hired "somebody that had consumer packaging experience as well as strong international experience because they were looking ahead to where they wanted to move the company," Appel says. "He's done a fantastic job there."
Freda was hired as President and COO of Estee Lauder, with the intention of becoming CEO within 24 months. On July 1, 2009, the day that Freda assumed the CEO position, Estee Lauder's stock closed at $16.15. On Wednesday it closed at $67.75.
Betty Chen, retail analyst at Wedbush Securities, expects the process to take somewhere between six and nine months to find a successor. But, she adds, it will be "critical to maintain the culture of the company," which is more entrepreneurial and collaborative and reflective of the yoga and fitness mindset of the product's consumers. Chen has a neutral rating on the stock.
While the exact reasons behind Day's departure are unknown - one theory is that the extensive travel needed to build Lululemon's international presence did not appeal to her -- Chen said it would be disappointing if Day left as a result of the Luon debacle.
"It's important to keep in mind during her five to six years that she's been able to lead [Lululemon] through tremendous growth, expand their product offerings and set the foundation to seed those international businesses," Chen said. Given the dramatic change to Lululemon's competitive landscape over the past five years, it's possible that the company will try to grab an executive from up-and-coming competitors, like Gap's (GPS) Athleta or sporting rivals like Under Armour (UA) that are increasingly focusing on yoga wear, suggests Motley Fool contributor Andrew Marder.
Another issue for Lululemon is that it still has to fill several other executive positions at the same time as finding a new CEO. These include head of product design, logistics and supply chain positions.
"We do believe that these searches will continue to be conducted and that Christine Day and the board can still fill them without waiting for the CEO [position] to be filled," Wedbush's Chen says. "Perhaps some of these appointments, along with the business recovering, will start to alleviate some of the investor concerns."
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