Lululemon CEO hire from Nike fails to impress investors, shares sink

A Lululemon store is pictured in Toronto. (THE CANADIAN PRESS/Laura Proctor)

Investors in Lululemon Athletica expressed disappointment on Thursday after the athletic apparel maker picked its new CEO from struggling rival Nike, dropping shares about 12 per cent to their lowest level since 2020.

Lululemon, best known for its stretchy yoga pants, on Wednesday selected former Nike executive Heidi O’Neill as CEO, winning praise for naming an outsider but also drawing criticism for picking someone from a company that has grappled with lost market share and declining revenue.

“We do not expect the market to receive this appointment positively given O’Neill’s longstanding tenure at Nike, which overlaps with the brand developing many challenges that parallel the ones LULU is currently facing,” BTIG analyst Janine Stichter said.

O’Neill, who left Nike in September and will not start work at Lululemon until her non-compete contract provision expires in September, was most recently president of consumer, product, and brand and was credited with growing the women’s business and increasing apparel sales.

Parallels with Nike

But investors also noted her tenure at Nike coincided with years of slowing demand, brand fatigue and execution missteps - challenges that Lululemon also faces.

Her appointment ends a months-long search for a CEO after activist investor Elliott Investment Management pushed for change at the top and as Lululemon founder Chip Wilson, who says the brand has lost its “cool” factor, is pressing to install new directors in a board fight. Former CEO Calvin McDonald left at the end of January after nearly eight years in the role.

Elliott declined to comment on O’Neill’s appointment. Wilson, who owns about 4.3 per cent of the company, continues to believe a board overhaul should have come before the CEO’s hiring, a source familiar with the founder’s thinking told Reuters.

O’Neill will not be on the ballot when investors vote at the annual meeting, which is expected to be in June, because her start date is not scheduled until Sept. 8.

Investor reaction to the new CEO pick was quick and sustained, cleaving off nearly US$2 billion in valuation and leaving the stock price around $144.

Many investors worried how O’Neill would revive Lululemon’s image by upgrading its products and marketing, as well as supply chains, as Nike faces similar problems.

Nike’s stock hit a more than decade-low this month after CEO Elliott Hill warned of a sharp sales drop and continued weakness in China, frustrating analysts and investors.

Lululemon has also dealt with product recalls for some of its pricey leggings and has tried to balance inventory levels as it deals with intensifying competition from upstart brands such as Alo Yoga and Vuori in the U.S.

“Lululemon needs a turnaround CEO and not a growth CEO,” said BNP Paribas analyst Laurent Vasilescu in a note.

But some industry analysts praised O’Neill’s background, noting she combined product leadership with managing a large organization. This is a mix “that should support LULU’s strategic plans as it balances innovation, international expansion, and execution against longterm growth goals,” analysts at Telsey Advisory Group wrote.

Not the right fit?

Several investors, including hedge fund Elliott, which built a more than $1 billion stake last year, would have preferred former Ralph Lauren executive Jane Nielsen as CEO.

Analysts at Needham and Evercore ISI attributed the stock decline to disappointment that O’Neill and not Nielsen got the nod. They credit Nielsen, who was finance chief at Ralph Lauren for eight years until 2024 and for five years at Tabby handbag owner Coach, with turning around the two companies’ higher-margin business models.

Some investors saw a silver lining in the CEO pick, noting it is important O’Neill is an outsider and that the board did not pick one of the top internal candidates whom the investors blame for some of the company’s failings.

The investors also praised strong international sales numbers and innovative products like stretchier pants, noting that the signs of improvement are becoming visible.

But Lululemon faces Wilson’s proxy fight, where he wants investors to vote in three new directors to the company’s 10-member board. Lululemon last month appointed Chip Bergh, former CEO of Levi Strauss, to join the board.

“O’Neill may bring much-needed product experience to drive a brand reset. But for now, the core issues remain: an ongoing proxy fight that adds uncertainty and sky-high productivity that remains far from bottoming,” Jefferies analysts said.

(Reporting by Joel Jose, Aishwarya Venugopal and Juveria Tabassum in Bengaluru and Svea Herbst-Bayliss in New York; Editing by Janane Venkatraman, Sriraj Kalluvila, Rod Nickel)