Analyst Sees Lululemon As A Likely Next Target For Activist Investor

Lululemon Athletica Inc.

is a likely candidate for an activist investor willing to team up with founder Chip Wilson to gain control of the company's board. Credit Suisse's Christian Buss made that call Tuesday after mulling two other scenarios: a leveraged buyout or acquisition by a strategic buyer, both of which he dismissed. "We see potential for an activist to act as a broker between the current board and Chip Wilson, reducing 'wild card' risk to shares," Buss said in a research note. A similar scenario may be emerging this week at American Apparel, where its ousted founder Dov Chaney has sought to team up with Standard General hedge fund. Wilson was ousted in December as Lululemon's chairman and chief executive over quality issues with the company's signature women's yoga pants, and his subsequent suggestion, in a widely televised interview, that women's fat thighs were responsible for the pants becoming too sheer But WIlson, who remains a director with a 28 percent stake in Lululemon, recently hired Goldman Sachs and reportedly may consider a proxy fight or joining a private equity firm in a buyout of Lululemon. Buss believes Lululemon makes an unattractive proposition to private equity firms because of its underlying economics. Further, those on the short list of prospective strategic buyers have demonstrated an aversion to buying high-margin businesses faced with eroding returns and a relatively high stock price, Buss said. Yet Buss thinks the company is in trouble. "They're losing focus," Buss said, citing investment in non-core kids' and men's clothing, as well as what he called a poorly targeted and simultaneous roll-out in eight international markets. Given Wilson's recent engagement and dispute with Lulumon's board, Buss says a likely scenario entails Buss selling part of his stake to an activist investor in exchange for support of a mutually agreed upon agenda. Buss maintains a Neutral rating at $38 target on the company. Lululemon closed Monday unchanged at $40.82. .