Did I use too low a bar?
This morning Chip Wilson, the founder of Lululemon (LULU), and I jousted over the notion that the company he started has lost its way.
It was a spirited and somewhat gentlemanly discussion about Lululemon that ultimately ended up being about how I think the company's doing a pretty darned good job and he thinks I am letting the company off the hook with too low a bar.
To me, the case seems pretty clear cut. I held up research that can be captured by headlines like "executing on top-line growth and margin turnaround," a bullish analysis by Credit Suisse of LULU's most recent quarter. Or "Lulu, 1st Q: Solid momentum reiterate guidance," by Keybanc or "Sustaining momentum separates from competitors as processes improve."
To me, it was an empirically good quarter with total same-store sales increasing 8%, which is better than almost every retailer or apparel company I follow save the sainted Ulta Salon (ULTA).
But not to Wilson, who said, "I think you're missing the point. The point is the company is being run so poorly and not just three years, probably four or five years, then you have to go after not the CEO but you have to go after the board."
He totally dismissed that CEO Laurent Potdevin had only had the top job for three years. He totally dismissed the fact that competitors Nike (NKE) and Under Armour (UA) are down 12% and 8%, respectively, while LULU is up 35%. (Under Armour is part of TheStreet's Growth Seeker portfolio.)
He said I was looking at the company as part of a very narrow context of competition. I pointed out that I couldn't find a single retailer or apparel company that had this kind of sales performance.
Nope, he still said I was setting the bar too low.
And he didn't even flinch when I said he has two board members including the co-chairman as part of his contingent, and to blame the board seemed foolhardy, especially when there was nothing to blame them for.
When my partner Carl Quintanilla asked him why he didn't just come back to run it, he said it would cost too much to get him. I said why didn't he just buy the company or at least offer what it would take to fix it, he just insisted again that I had set the bar too low and talked about how it should own the yoga category and should have been a lot bigger than Under Armour by now.
By the time I realized the pointlessness of arguing, the interview was over.
I found the dialogue, however, constructive in many ways. First, it shows you how darned hard it is to make money as an investor. Wilson had first been on Power Lunch a few weeks ago bad-mouthing the company and then it reported a fantastic quarter, according to Wall Street, which is the only bar I care about, and the stock's been off to the races ever since. You would think the founder who has two people on the board would have a better sense to come on and trash the company ahead of an excellent quarter. He really threw you off the scent.
Second, you have to understand that all business is relative. Yes, Lululemon should be bigger by now given the category, but the turn took a little longer than expected because the franchise was a little more damaged than the new CEO had expected. Still, same-store sales numbers don't lie. This company's exceeding just about everyone in the cohort, which is again what matters.
Finally, the notion that it's the board's fault is chimerical. With those numbers, there's nothing to fault and Wilson wasn't at all able to explain what the board was doing wrong or what it should do to help the CEO.
Suffice it to say, though, that I did think Wilson's position toward my position was ill-advised. I try to have the highest bar there is, a virtual pole vault when others seek the high jump. And for that I can tell you that only Ulta surpassed this company's game and that, to me, says it's a buy, not a sell, and Wilson should go pick on someone else, like the dozens of other retailers that have failed to live up to the new standards of Lululemon.