Chief executive officers live in that amorphic, ever-changing space between perception and reality.
There’s the business they run, which in fashion always has all of the inevitable foibles. And then there’s the vision that they conjure and sell — to their boards, to analysts, to investors, to everyone.
The sales pitch is about growth and building up the brand. The rest of the job is about getting that reality to sync up.
Calvin McDonald, the suddenly outgoing CEO of Lululemon Athletica Inc., has been a master of promising — and then delivering — the moon. Not just once, but over and over.
Revenues at the athleisure brand are on track to triple during his seven-year run, hitting $11 billion by the time he leaves next month. Net income ballooned to $1.7 billion as margins on earnings before interest and taxes expanded from 18.7 percent just before he joined to 22 percent during the past 12 months, according to S&P Capital IQ.
Bigger and more profitable is what CEOs want and investors require.
But Wall Street is also an extremely what-have-you-done-for-me-lately kind of place.
For most of his tenure, McDonald was pointing ever forward and investors, seeing the returns and trusting in more, pushed higher.
Too high.
Just 24 months ago, Lululemon had a market capitalization that topped $60 billion. Even with a 9.6 percent jump on Friday, it is now under $25 billion.
The perception of where Lululemon was headed and where it actually was, switched places.
Specifically, the high hopes for future growth collided with troubles in the company’s more mature home market, where comparable sales fell 5 percent in the third quarter. McDonald acknowledged this fall that the brand let its “product life cycles run too long” in core categories and that “we have become too predictable within our casual offerings and missed opportunities to create new trends.”
But the fix didn’t come fast enough.
Wall Street flipped the script on Lululemon (or vice versa) and the brand that was growing to the sky turned into the company that couldn’t keep its growth up and was struggling to compete in a world filled with able competitors, from Alo, Vuori and seemingly every other brand.
Lululemon’s sales grew 7 percent to $2.6 billion in the third quarter — among the best performances in fashion — but the stock has been a laggard as expectations were reset.
Founder Chip Wilson has railed from the outside that the board insists on “finance CEOs who can ‘speak Wall Street,’” but, if anything, McDonald, who’s leaving by mutual agreement with the board, is out because he couldn’t sell investors on the dream anymore.
Or at least he couldn’t sell investors on the idea that he was the one to deliver the Lululemon dream.
McDonald will likely have a third act as CEO. He took Sephora in the Americas from $3 billion to $9 billion in five years and Lululemon from $3 billion to $11 billion. That’s a trick that’s still going to be valuable on Wall Street.
Lululemon recently remodeled its SoHo store in New York.
Courtesy of Lululemon
His tenure at the top is also going to be looked at closely and with the benefit of hindsight.
Laurent Vasilescu, an analyst at BNP Paribas Securities, said the company’s dramatic growth was driven by new stores, the international push and also the strengthening trend in athleisure when McDonald joined and during COVID-19.
Now the trends are stacking up against Lululemon.
There is more competition, a return to dressier styles and economic pressures on the U.S. consumer.
And Vasilescu said Lululemon’s merchandising missteps are not the first under McDonald’s watch or the company’s first.
“It’s multiple product issues,” Vasilescu said in an interview. “If you go back to the 2019 investor day, he talked a lot about beauty, self-care — completely failed. Then in 2020, [the acquisition of at-home fitness company] Mirror. Total shambles, right? In 2021 it was the secondary market of apparel. In 2022, footwear. In 2023, Wundermost shapewear.”
For Vasilescu, the solution is a CEO who lives and breathes the industry.
“People really want to see someone who is an operator that is in the industry that understands bringing back good product,” he said. “The brand’s not damaged. The brand is still strong, but it’s mis-executed on product launches over the last few years.”
At least for now, Lululemon will get something of a break from investors. A management team that’s struggling to get a brand’s mojo back is one thing, a brand with a storied history getting a fresh set of eyes and a new plan is something else entirely.
“Management is looking for an individual with experience in ‘growth’ and ‘transformation,’” said Simeon Siegel, an analyst at Guggenheim Securities, in a research note. “The search for a new CEO offers Lululemon a grace period as investors ponder a strategic reset.”
A little grace, while nice, will only last so long.
Tom Nikic, an analyst at Needham & Co., said: “While the brand’s recent struggles in the U.S. may necessitate a new viewpoint, the transition does add to the uncertainty in the name. C-suite executives in our space usually like to ‘reset numbers’ upon taking the seat, so we’d be concerned about a conservative initial 2026 outlook when the company next reports earnings.”
Lululemon is going to have to play the expectations game again. And the next CEO is going to have to manage both the perception and the reality of a powerhouse brand in flux.
The Bottom Line is a business analysis column written by Evan Clark, deputy managing editor, who has covered the fashion industry since 2000.
