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Lululemon CEO Departs Amidst Underperformance and Founder’s Scrutiny
Lululemon’s shares saw a significant jump in premarket trading following the announcement that CEO Calvin McDonald will be stepping down at the end of January. This leadership change comes after a year of underperformance for the athleisure giant and persistent calls for reform from its founder and largest independent shareholder, Chip Wilson.
McDonald’s departure, effective January 31st, coincides with the company’s release of its fiscal third-quarter earnings, which exceeded analyst expectations. Despite the positive earnings report, the company also issued a round of weak guidance for the upcoming quarter, adding to the pressure on its leadership.
Lululemon’s New York-listed shares surged by approximately 9.35%, trading around $204.50, after an initial 10% rise in extended trading on Thursday.
The company’s board of directors has initiated a search for McDonald’s successor, engaging a “leading executive search firm.” McDonald will remain with Lululemon as a senior advisor through March 31st.
“The timing is right for a change,” McDonald stated during a call with analysts, reflecting on his tenure. “I’ve described being CEO of Lululemon as my dream job. It truly has lived up to every expectation and given me the opportunity of a lifetime.”
During the interim period, Lululemon’s CFO Meghan Frank and Chief Commercial Officer André Maestrini will serve as co-CEOs. Additionally, board chair Marti Morfitt will assume an expanded role as executive chair.
Morfitt emphasized the company’s strong foundation but acknowledged the need for a new leader to guide it through a transitional phase. “As we look to the future, the Board is focused on identifying a leader with a track record of driving companies through periods of growth and transformation to guide the company’s next chapter of success,” Morfitt said in a statement.
The leadership shuffle follows a period of notable struggles for Lululemon. Founder Chip Wilson, a vocal critic, took out a full-page ad in the Wall Street Journal two months prior, asserting that the company was “in a nosedive” and urging it to “stop chasing Wall Street at the expense of customers.”
Third-Quarter Performance Exceeds Expectations, But Future Guidance Lags
Lululemon’s fiscal third-quarter results, ending November 2nd, outperformed Wall Street’s predictions:
- Earnings per share: $2.59 vs. $2.25 expected
- Revenue: $2.57 billion vs. $2.48 billion expected
The company reported a net income of $306.84 million, or $2.59 per share, for the quarter, compared to $351.87 million, or $2.87 per share, in the same period last year. Sales increased to $2.57 billion from $2.40 billion a year prior.
Despite the strong third-quarter performance, Lululemon’s guidance for the current quarter fell short of analyst estimates. The company anticipates sales between $3.50 billion and $3.59 billion, generally below the expected $3.60 billion. Expected earnings per share are projected to be between $4.66 and $4.76, significantly lower than the anticipated $5.03.
In a positive shift, after cutting full-year guidance in the previous two quarters, Lululemon raised its full-year expectations, projecting sales between $10.96 billion and $11.05 billion and earnings per share between $12.92 and $13.02, largely in line with analyst estimates.
McDonald noted strong demand during Thanksgiving weekend, which facilitated the clearance of older inventory at discounted prices. However, he also acknowledged a recent slowdown in trends since Thanksgiving, which has been factored into the fourth-quarter guidance. “Despite this,” McDonald added, “we expect revenue trends in the U.S. and Q4 to be modestly improved relative to Q3.”
Navigating Headwinds: Tariffs, Consumer Shifts, and Competition
Lululemon has faced a challenging year, grappling with the impact of tariffs, a cautious U.S. consumer, and a product line that has struggled to captivate shoppers as it once did. The company also faces intensified competition from emerging brands like Vuori and Alo Yoga, alongside a broader shift in consumer preferences from athleisure to more casual wear like denim.
To counter these pressures, Lululemon has focused on international expansion and diversifying its product offerings beyond traditional workout gear to include shoes, outerwear, and casual work attire. While overall business growth is evident, it has primarily been driven by international markets and new store openings, with the Americas, Lululemon’s largest market, experiencing a decline.
During the quarter, revenue in the Americas decreased by 2%, with comparable sales down 5%, while international sales surged by 33% with an 18% increase in comparable sales abroad.
The company is also feeling the effects of the end of the de minimis exemption, which previously allowed low-value packages to enter the U.S. duty-free. Initially expecting tariffs to impact full-year profits by $240 million, Lululemon now anticipates a reduced impact of $210 million due to progress in vendor negotiations and other mitigation efforts.