If Lululemon Founder Moves On, Should You?

With a regulatory filing, Lululemon (NASDAQ: LULU) founder Chip Wilson has paved the way to be able to sell his entire stake in the company. This is never a good sign, although it does ends a tense relationship between Wilson and the company he founded nearly 20 years ago.
Wilson owns 14% of Lululemon and by all accounts he helped usher in a new trend in the athletic and casual wear market, bringing yoga pants mainstream. But he’s since had a falling out with the company over its strategic direction. Thus, he’s looking to cash out.
But not all founder relationships go awry. Under Armour (NYSE: UA) CEO Kevin Plank has successfully managed to gain ground on the athletic apparel giant Nike (NYSE: NKE) and he’s further securing himself as CEO of Under Armour.
He owns just over 15% of the company and the company recently announced plans to issue a third class of stock with no voting rights. Doing so is a play to keep Plank’s ownership level above 15% — if Plank’s ownership falls below 15% the current dual class voting structure would come to an end. But with the stock up 1,200% since the 2005 IPO, no one’s really complaining that the company is making a big bet on Plank.
Now, shares of Lululemon haven’t been paltry either, up 380% since the 2007 IPO, a return that’s more than ten times the S&P 500 return. Lululemon also has a jump on the competition with over 300 stores, but competition is driving down Lululemon margins. The company isn’t helping itself with margin compression either, where it’s offering lower-margin seasonal products in an effort to keep customers coming back.
What’s more, shares of Lululemon are trading at a P/E ratio of 36x. Under Armour isn’t any better, also trading at an outsized valuation, with an 87x P/E ratio.
Is there a better option?
The Gap (NYSE: GPS) is known for its everyday clothes, but it is also heavily invested in the popular yoga market as well, with its Athleta brand. It trades at a much more reasonable 13x P/E ratio. Indeed, its return on invested capital dwarfs both Under Armour and Lululemon. Neither Lululemon nor Under Armour pay a dividend, while the Gap pays a dividend that’s yielding 2.4%.
In terms of Atheta, it was The Gap’s big bet in 2008 on activewear that’s paying off. This segment of the apparel market is one of the fastest growing around, with the potential to grow by 50% in the next five years. And unlike Lululemon, The Gap still has a lot of runway with Athleta in terms of store openings, planning to open 20 this year.
Granted, though The Gap is seeing competition in its other apparel lines, it’s still generating $16 billion in revenue a year. The beauty of The Gap is that it attacks the market from different angles with its Banana Republic, Old Navy and The Gap brands –all serving a slightly different end market.
We still have a few catalysts for The Gap as well – beyond further Athleta expansion. These include right-sizing stores by shutting down underperforming stores and making a greater push to e-commerce. Gap has already proven that it knows how to sell online, with e-commerce sales doubling in the five years ending from 2008 to 2013. This is an area where it can further gain ground on Lululemon as well, which hasn’t done all that well with getting customers to shop online.
We have Chip Wilson and Lululemon to thank for paving the way for activewear to go mainstream, but its success has attracted a lot of competition. As an investor it might be time to pass the torch from the smaller company to a company with the presence to capitalize on the trend in a much larger way, and that’s where The Gap comes into play.

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