nike-buy-lululemonI hadn’t heard it suggested until a colleague of mine hinted at it in an article this week. It was a question I had not yet asked myself. “Should Nike buy Lululemon?”

The more I think about it, the more I think the answer is yes.

Lululemon (Nasdaq: LULU) shares have been under tremendous pressure since peaking just above $80 around this time last year. A scandal soon broke out about Lululemon’s signature yoga pant being see-through. The result was a recall and loss of confidence that ignited the fall in the company’s stock.

Since the peak, shares are down roughly 50%.

The most recent hit came after a lackluster earnings report a couple weeks ago. The stock fell 16% despite the fact that the company actually beat earnings expectations by $0.02 per share.

The company faces some real issues.

Founder and 27% owner of Lululemon Chip Wilson, who stepped down from the company’s board last month, was reported to have voted against two Lululemon board members including its Chairman. Despite the fact that they were still elected to the board, investors see this as foreshadowing for a battle between the board and Lululemon’s founder.

I, too, see this as the set-up for some kind of corporate drama. But I think that corporate drama will be a buyout and I think it will be positive for shareholders.

Reports suggest that Chip Wilson has hired Goldman Sachs (NYSE: GS) to advise him on his options. Whether he tries to force a sale, decides to partner with a private equity firm for a leveraged buyout or just sells his stake, Chip Wilson’s 27% ownership is a force to be reckoned with.

On its most recent earnings call the company also announced that its CFO was retiring and the CEO called this a “transition year.”

While same store sales fell for the second quarter in a row – a bad sign – overall sales rose 11%. I think there is still a considerable opportunity for Lululemon investors, especially if the company joins up with the distribution and marketing muscle of an acquirer.

Now, trading at a PE of 24.2, Lululemon shares haven’t been this cheap since the depths of the financial crisis.

nike-buy-lululemon

Source: Y Charts

It is because of this that I think a buyout is likely. At home in Boulder, Colorado – perhaps the epicenter of the Whole Foods (NYSE: WFM) shopping, yoga pant wearing world – it’s clear that Lululemon’s popularity is not waning.

While it can be dangerous to rely solely on anecdotal evidence, I feel pretty confident that the brand would crack in a place like this before the rest of the yoga market would abandon Lululemon as the yoga and fitness clothing brand of choice.

I can think of three companies that would be a good fit for buying Lululemon. Nike is the elephant in the room. The $66 billion sports merchandise giant seems to be the most natural fit.

Still, Adidas (OTC: ADDYY) and VF Corp (NYSE: VFC) could also be a good fit.

At a little under $7.5 billion, Lululemon would be a major acquisition for either company. Adidas is a $21.5 billion company and VF Corp a $27 billion company. But stranger things have happened. Lululemon would certainly fit nicely with VF Corp’s higher-end brands like Ugg and The North Face.

But for $66 billion Nike, with $5 billion in short-term investments or cash and only $1.3 billion in total debt, buying Lululemon whole is entirely possible.

With Lululemon trading at the lowest levels since the worst of the financial crisis and its products still performing well, I expect that one of these three companies to step to the plate.

Frankly, I think Nike will buy Lululemon.

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Published by Wyatt Investment Research at