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Lululemon Jumps on Report Wilson Talking to Private Equity

Stocks in this article: LULU UA NKE GS VFC

NEW YORK (TheStreet) - Shares of Lululemon Athletica (LULU) were rising Thursday after The Wall Street Journal reported that founder Dennis "Chip" Wilson was talking to private equity firms about taking the yoga apparel maker private. Firms that Wilson had reportedly been talking to included Leonard Green & Partners, the newspaper reported.

No deal had been reached yet but as the Journal points out, Wilson is "actively exploring options as he seeks to exert more influence over how Lululemon is run." Lululemon jumped as much as 5.6%. The shares have lost 28% this year. 

A deal to take the Vancouver-based company private, however, would be expensive, considering that investors would expect a premium to its $7.5 billion market capitalization. As TheStreet's sister site The Deal has emphasized, private equity firms tend to steer away from companies that trade much above 7 times Ebitda, particularly in the cyclical world of retail.

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Lululemon, was trading at about 12.5 times the $420 million in Ebitda projected for its current fiscal year, The Deal article states, which ran on June 24. "The higher the multiple, the more equity a PE firm or firms have to sink into a deal, and the riskier the investment becomes," the article said.

As of Thursday, Lululemon had a market cap of $6.3 billion.

Last month Wilson hired Goldman Sachs (GS) to discuss ways to shake up its board of directors or perhaps take the company private. Wilson, who gave up his chairmanship late last year when the company hired its new CEO Laurent Potdevin, has been critical of Lululemon's current board. Wilson had released a statement prior to the Vancouver-based company's annual meeting in June in which said he voted against re-election of two outside directors -- Lululemon's chairman and a former Starbucks (SBUX) executive, Michael Casey, and private equity executive RoAnn Costin Wilson.

According to Bloomberg, Wilson owns approximately 35% of Lululemon's stock.

Lululemon is trying to stem the bleeding caused by its Luon pants fiasco last year by re-merchandising stores, focusing on international expansion and driving sales through social media as well as in-store technology, CEO Laurent Potdevin noted on last month's earnings call. However the question is whether the company can reenergize the brand quickly as competitors like Under Armour (UA), Nike (NKE) and retailers like Gap's (GPS) Athleta as well as fashion retailers VF Corp (VFC) and H&M all seeing opportunity to play in Lululemon's sandbox.

Lululemon had lowered its outlook for the second quarter and fiscal year when it reported fiscal first quarter earnings last month.

Credit Suisse analyst Christian Buss said in a June 30 note that there were encouraging signs that the company's supply chain issues are abating.

"Our analysis of over 3,800 lululemon SKUs on the company's eCommerce website suggests that LULU's full-priced sell-through and in-stock positions have improved since January, a positive indicator given recent supply chain challenges," Buss wrote. "With lululemon's recent challenges both supply chain and demand related, we are encouraged that the former looks to be moderating, and believe there could be some margin and comp relief heading into 2H. However, until we see signs that underlying demand challenges have been resolved we believe caution remains in order with respect to shares." Buss rates lululemon shares neutral.

A spokesman for Chip Wilson said via Twitter that it was "way too early to speculate" on any transaction. An email by TheStreet to Wilson's spokesman for comment was not immediately returned. An email to Lululemon was not immediately returned.

.@DanaMattioli @SuzanneKapner It is way too early to speculate on what transaction Chip Wilson may or may not do Chip Wilson Press (@ChipWilsonPress) July 2, 2014

--Written by Laurie Kulikowski in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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