Updated 6:39 p.m. ET Dec. 11
Calvin McDonald is leaving the corner office at a changed Lululemon Athletica Inc.
The chief executive officer — who built the activewear brand into an industry powerhouse only to see the business falter lately — will step down as CEO and a director on Jan. 31, according to a Securities and Exchange Commission filing.
“In my conversations with the board, we carefully considered what’s ahead for the company and for my own journey together,” McDonald told analysts on a conference call Thursday afternoon.
The resignation came as Lululemon released third-quarter results that showed a 7 percent increase in net revenues, to $2.6 billion, but highlighted continued weakness in the company’s home market. Comparable sales in the Americas fell 5 percent while the international business comped up 18 percent.
“We agreed that the timing is right for a change as we near the end of our five-year planned cycle,” McDonald said. “I am incredibly proud of what we have accomplished together over the past seven years. Lululemon is a very different and much stronger company today than when I first joined the organization in August of 2018.”
By almost any measure, McDonald had a remarkable run, pushing Lululemon into men’s, overseeing expansion abroad and more. Revenues during his tenure are slated to more than triple and are on track to hit $11 billion this year.
But while the company seemed bulletproof for much of that time, the business has faltered lately and is resetting in the U.S.
Founder Chip Wilson — who still owns more than 8 percent of the firm — has also been sniping lately, publicly proclaiming that Lululemon is “in a nosedive.”
“The board insists on operator/finance CEOs who can ‘speak Wall Street,’ rejecting the idea of a product-driven CEO,” Wilson proclaimed, paying for a newspaper ad to get the word out. “These types of finance-focused CEOs don’t know how to attract or motivate creative talent, and even worse, they think they understand great product when they don’t. Without an eye for outstanding design, the company dies a slow death.”
Wilson had his own problems with product and image, stepping away from the company after receiving flack for saying some of the brand’s leggings were only see-through because the women wearing them were too big.
It is not clear exactly how much sway Wilson will have at the company now.
While the founder has complained about management, the board has been squarely in his sights for some time and unless there’s a dramatic proxy battle for control, it’s the current board that will be choosing the next CEO.
Regardless, McDonald has left a legacy of dramatic growth and a focus on sport, including yoga, of course, but also running, training, golf and tennis.
But McDonald acknowledged to analysts this fall that Lululemon had lost some of its pop.
“While the guest is responding well to many of our new styles, they are not reacting as we had anticipated to the updated seasonal colors we brought into our core assortment,” the CEO said in September. “We have let our product life cycles run too long within many of our core categories. Particularly in lounge and social. We have become too predictable within our casual offerings and missed opportunities to create new trends.”
McDonald’s isn’t the only high-level departure the brand has seen.
Last month, Celeste Burgoyne, president of the Americas and global guest innovation, revealed plans to leave the company after 19 years to become chief revenue officer for Vail Resorts. Chief product officer Sun Choe left last year to lead the turnaround of Vans at VF Corp.
Now somebody else is going to have a turn to rebuild at Lululemon.
Marti Morfitt, chair of the board, will serve as executive chair and named two interim co-CEOs — chief financial officer Meghan Frank and president and chief commercial officer Andre Maestrini.
The board has established a CEO search committee to find a permanent captain.
McDonald will receive a $3.1 million severance payment.
“Serving as CEO of Lululemon has been the highlight of my career, and I am incredibly proud of everything our team has accomplished over the last seven years,” said McDonald in a statement. “Together, we have transformed the athletic apparel industry and the opportunity ahead for Lululemon is substantial. I believe the outstanding product pipeline we’ve built, and action plan we’ve put into place, will yield positive results, and deliver value to shareholders in the months and years ahead. I am committed to fully supporting the transition and helping guide our leadership team in my advisory role as they execute against our strategy.”
Morfitt thanked McDonald for “his visionary leadership building Lululemon into one of the strongest brands in retail.”
“During his tenure, Calvin led Lululemon through a period of impressive revenue growth, with differentiated products and experiences that resonated with guests around the world,” Morfitt said. “We are grateful for Calvin’s numerous contributions and appreciate his continued support over the coming months to facilitate a seamless transition.”
The irony is that, while Lululemon is one of the best performers in fashion by sales, it’s had one of the weakest stock performances lately.
Lululemon’s market capitalization hit an all-time high of $64 billion just under two years ago — but the company has lost $42 billion of that since.
Investors were feeling more bullish now that sweeping change is coming to the C-suite, pushing shares of the company up 10.4 percent on Thursday to $206.37 in after-hours trading.
Growth usually solves all for Wall Street and Lululemon and McDonald earned the benefit of the doubt from investors, who hardly blinked when the company’s $500 million pandemic-era deal to buy Mirror, an in-home fitness company, went south.
But the company’s business in North America slowed, overshadowing dramatic growth abroad.
“McDonald did a terrific job in planting Lululemon’s flag internationally, tapping a near-virgin market for athleisure apparel,” said Craig Johnson, president of Customer Growth Partners. “But in its domestic U.S. and Canada market, fully mature several years ago, McDonald continued to expand its footprint at nearly the same pace since the pre-COVID[-19] era,” Johnson said. “Meanwhile, peers such as Gap Athleta, Free People/Movement, Vuori, Beyond Yoga, Alo and a host of smaller players continued to add capacity to serve demand growth that had clearly slowed. The result was one long-seen in the retail sector — where an initial burst of excitement leads to overexpansion, with square feet capacity soon overtaking organic demand growth.”
For the quarter ended Nov. 2, operating income fell 11 percent to $435.9 million as operating margins decreased 350 basis points to 17.
While many fashion CEOs would turn cartwheels if they could hit a 17 percent operating margin, the trend is going the wrong way for Lululemon even though results topped the company’s own expectations.
Net income fell to $306 million from $351.9 million. And diluted earnings per share fell to $2.59 from $2.87 a year earlier and were still significantly better than the $2.21 analysts had penciled in.
Inventories ended the quarter up 11 percent, valued at $2 billion, and were up 4 percent on a unit basis.
For the full year, Lululemon expects revenues to be about $11 billion, growing 5 or 6 percent, excluding fiscal calendar changes.
Diluted EPS is expected to range from $12.92 to $13.02, down from $14.64 the prior year.
Neil Saunders, managing director of GlobalData, described the results as undeniably “soft.”
“While the results themselves do not warrant a resignation, the somewhat muddled strategy has caused a lot of noise as Lululemon’s founder has become an outspoken critic of the brand’s direction,” Saunders said. “This made the position of Calvin McDonald difficult and is one of the reasons for his exit.
“That said, Lululemon is now a brand without a captain at the very time when it needs a strong sense of direction,” Saunders said. “While the market and investors may welcome a change, this shift seems very sudden and hasty. It will be critical for Lululemon to quickly put in place a new CEO or have a very clear interim strategy for getting back on track.”
