The Epic Drama at Lululemon

For the last several years, there's been an epic fight over the future of Lululemon. Our colleague Suzanne Kappner has been following every twist and turn. Firstly, you've got a founder who just won't walk away. So it's, you know, suffering from a case of founder syndrome. And he has been lobbing criticism at this company from the sidelines for almost a decade. So if you look at about 30% of their men's stuff, it's to me, it's like, it's appalling. I have been comparing the Lululemon to the competition in which Nike and Under Armour, which is really, they've done appalling. The company's being run so poorly, and it's been not just three years, probably four or five years. You know, it kind of reached a pinnacle when he launched a proxy fight against the company. Lululemon founder Chip Wilson. Lululemon is launching a proxy fight at the athleisure company in an effort to shake up the board. And during all this drama, sales have been slowing. Lululemon really created the athleisure market. And for a long time, it didn't have many competitors. But in recent years, the category has gotten a lot more crowded. You have Allo and Beyond Yoga and Viore and a number of new upstarts that are taking share that are more on trend, that have become more nimble in knowing and predicting. What customers want. But the company finally thought it had someone to right the ship. After an exhaustive search, a new CEO started at Lululemon earlier this month. She comes with about 25 years of experience at Nike. Her name is Heidi O'Neill. How did the market receive the news that Heidi O'Neill was going to be the CEO? Well, the market was not happy. Lululemon shares are down about 5%. As a company names a new CEO, the company naming. The stock price went down quite a bit the day of that announcement. Lululemon tumbled after it announced the appointment of Heidi O'Neill as the new CEO. Since then, Lululemon's stock has kept falling. It's down about 50% this year. What would you say is the question that's hanging over Lululemon now, going forward? Who does it want to be? Who is its customer? Who is it targeting? It can't be everything to everyone. It was kind of lashing out in all directions. It needs to focus and figure out who it is and who its customers are. How hard will it be for this new CEO to bend this company back into shape? It's not going to be easy. There's a lot of work to be done. And boy, does she have an uphill battle. Welcome to The Journal, our show about money, business, and power. I'm Ryan Knudson. It's Friday, September 25th. Coming up on the show, the battle over who wears the pants at Lululemon. This episode is presented by Intuit Credit Karma. Relaxation doesn't always look like spa days or fluffy pillows. Sometimes it's simpler than that. It's when those pesky tasks you don't have time for, like hunting down your credit card perks, are handled for you. 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And listeners of this show will get a $75 sponsored job credit to help get your job the premium status it deserves at Indeed.com slash podcast. Just go to Indeed.com slash podcast right now and support the show by saying you heard about Indeed here. Indeed.com slash podcast. Terms and conditions apply. Hiring now? Then this is a job for Indeed's sponsored jobs. If you pay close attention to what people are watching, or what you're wearing these days, it can feel like everyone's on their way to the gym. People wear stretchy leggings and runner jackets to go shopping, meet friends, grab coffee, all without any intention of actually working out. The man who set this whole world in motion was Chip Wilson. People have been wearing spandex since the 80s, but he did innovate with the fabric, and he created these pants that were so comfortable and so flattering that women didn't want to just wear them to yoke class or to the gym. They'd wear them out socially. It just, he created this phenomenon that we now call athleisure. One day in the late 1990s, when Wilson was running a small sports apparel company in Vancouver, he went to a yoga class. And he noticed that people weren't wearing the best gear for stretching or absorbing sweat. It sort of opened his eyes to this growing popularity for yoga. And he really just, he saw this market before anybody else did. At one point when I looked at, what the women in yoga were wearing, I went, well, I've got a much, much better product than these kind of, because everyone wore really their worst clothing to the gym, their worst clothing to yoga. And in yoga, if it's baggy, then the teacher can't really see the alignment or the position of the body. In 1998, Wilson founded Lululemon. He says that at its core, the company was designed for a single persona. The quote, Supergirl. Supergirl is a 32-year-old woman who's highly educated, career-oriented, and health-conscious. I call the Supergirls Supergirls because in the 90s, for the first time, you saw a girl with superheroes like cartoons. And so they were wearing Lycra, and they were equal in power to men. For the Supergirl, Wilson priced the leggings at a premium. A typical pair would run you about 15 bucks. Lululemon charged close to $100. Despite the high cost, or maybe because of it, the leggings became a hit. It really took off. And it was a combination of the product was great, but they also had this community focus where they enlisted yoga teachers and other athletic teachers from local neighborhoods to be brand ambassadors. And they would have yoga classes in their stores. And they really created this grassroots following that, made for very, very loyal customers. Wilson opened the first Lululemon store in Vancouver in 2000. In the following decades, the company grew into a multi-billion dollar, stretchy-pant behemoth. In 2005, Wilson stepped down as Lululemon's CEO and sold some of his shares. He did sell a big stake to Advent International, a private equity company. And he regretted that deal almost from day one. And he just felt like, Advent and the CEOs they brought in were kind of, as he put it later, the type of managers who know how to speak Wall Street, but don't know about how to create, you know, great innovative products. And so he was never quite happy with the direction of the company. Do you think your exit from the company was actually the best thing for the company at the time? Oh, I'd say no. After he left his CEO and a new partner, Wilson stayed on as chairman of the board. And he remained very involved with the company. He's also the largest individual shareholder. He used his position as founder to offer unsolicited opinions and make decisions without the sign-off of leadership. Eventually, the Lululemon board stepped in. They gave him guidelines like, "Don't give people advice unless they ask for it." And work through the CEO, not around the CEO. Then, the CEO of Lululemon said, "I don't care about the company. I just don't care about the company." And that's when, in 2013, the seams really started to split. Lululemon had to recall a line of black pants after customers complained that they were pilly and scratchy. But the biggest problem was that the pants were see-through in certain positions. And Chip, in a television interview, suggested that, well, it was, the reason they were see-through is that some women's bodies just aren't right for those pants. The thing is, is that women will wear seatbelts if it doesn't work, or quite frankly, some women's bodies just actually don't work for it. Like, the suggestion is, you know, some of these women are too heavy to be, or they don't have the right shape to be wearing these pants. And so that created another problem for the company. At the time, a Lululemon spokeswoman said that the see-through problem wasn't widespread. Soon after he made his comments, Wilson issued an apology. I'm sad for the people at Lululemon who I care so much about, that have really had to face the brunt of my actions. About a month later, Wilson announced he would step down as chairman. By 2015, he left the board completely, saying that he felt the company was, quote, back on track. In 2018, there was another changeover at the top. Lululemon got a new CEO named Calvin McDonald. Calvin was a former Sephora executive. And during the pandemic, Lululemon did phenomenally well because we were all sitting at home and we wanted comfy clothes and everybody was buying its leggings and its, you know, sweatshirts. And so sales went up tremendously during the pandemic. And he started opening a lot of stores and put some very aggressive sales goals out there. Under McDonald, the number of physical Lululemon stores grew to 780 worldwide. But to some outside observers, it seemed like the company was losing focus. It moved beyond Chip Wilson's Supergirl persona. Lululemon stores, started making clothes for new sport categories like tennis and golf. And it entered new brand partnerships. He did a licensing deal with Disney to put Mickey Mouse and other characters on Lululemon products. He did another deal with the National Football League, one with the National Hockey League. People were like, Lululemon should be about making innovative product that helps you work out better. How does wearing a Mickey Mouse sweatshirt do that for me? It started to really muddy the waters. And then sales, in North America, which had been growing, growing, growing, started declining. New competition like Aloe and Viore have been siphoning away Lululemon's core customers. These new brands were on top of trends, offering more color options, sets, and looser-fitting workout clothes. Last year, Lululemon's stock fell so much that it erased over $25 billion in market value. Lululemon, they didn't seem, to really acknowledge the severity of the problem. Chip, on the other hand, was out there telling pretty much anyone who would listen, hey, wake up, there's a problem here. Then, Chip Wilson went nuclear inside the pages of the Wall Street Journal. That's next. This episode is brought to you by Workday. Guessing is for game shows, not your business. Especially when your margin for error is zero. Workday is the enterprise AI platform for HR, finance, and IT. With a deep understanding of your organization's context and guardrails. So every AI action is permission aware. Giving you accuracy 24-7. And the ability to not just get work done, but get it done right. It's a new Workday. In the race to reach customers. Ready, set, go! Shortcodes always win. Because customers open text messages from shortcodes 98% of the time. Go shortcodes! That's why banks, airlines, hospitals, and other major businesses trust shortcodes. And it's shortcodes by a mile. Lease a shortcode today at usshortcodes.com. The headline of this ad screams in bold type Lululemon in a nosedive. And is that a yoga move? I don't think so. I think he's just referring to the fact that it is, you know, in trouble. In the ad, Wilson outlined the many things he thought Lululemon had done wrong. He said that, you know, it's suffering from a CEO who knows how to speak Wall Street. And it has a loss of cool. He compared it to the gap, trying to be all things to all people. The ad also suggested that the company was missing someone like him. Saying, quote, a company bereft of a visionary loses its singular voice for product and long-term strategy. What he really wants is for the company to go back to focusing on technical apparel to be a leader once again in innovating on new fabrics and materials because that was really what set it apart. Then-CEO Calvin McDonald said that he agreed with some of Wilson's points. But he also defended that he was not going to be a leader. He also defended the company and pointed to years of growth under his leadership. Two months after Wilson's ad, McDonald resigned. But that's not enough to satisfy Chip. Chip launches a proxy fight. A proxy fight. A ruthless public battle for control over the company's board. When a powerful shareholder like Chip Wilson doesn't like the direction a company is going in, they can nominate their own like-minded board candidates. And then, try to convince other shareholders to vote for those candidates and thereby gain more influence over the company's future. In his proxy fight, Wilson nominated three board members. He's now communicating directly with shareholders and there are, you know, SEC filings on an almost weekly basis kind of laying out his case and supporting his nominees and, you know, trying to explain to shareholders why they should vote for his nominees. Lululemon fought back. Saying that Wilson's perspective was outdated. After months of fighting, the two sides ultimately reached an agreement. Two of Wilson's nominees were appointed to the board. But as part of the deal, he also had to sign a non-disparagement agreement. The document says that Wilson is not allowed to publicly criticize the company for 18 months. During all this, Lululemon was also actively searching for a new CEO. The company considered candidates with experience at other retailers like Ralph Lauren and Abercrombie & Fitch. In April, Lululemon finally announced its choice. And they land on Heidi O'Neill, who had spent a good part of her career at Nike. But when Lululemon announced the appointment, the company's stock price sank. And the reason is, they saw her as, you know, another sort of corporate suit coming in. They didn't feel that she had the turnaround chop. to tackle this job. Plus, her tenure at Nike's been a little bit marred with some mistakes. While at Nike, O'Neill spearheaded a direct-to-consumer strategy, pulling the brand out of retailers like Macy's and DSW. But that move backfired. Nike, since then, kind of went into its own downward spiral. In some ways, there's a lot of parallels to what happened with Nike. They were kind of the big gorilla in the room, and they, didn't see some of these newer players like Hoka and Ahn coming up behind them, and they really just kind of lost their footing. So, investors didn't feel like Lululemon was getting someone who was really equipped to do what had to be done. A Lululemon spokesperson said the board stands behind Heidi O'Neill, and that they're confident she's the right choice. It seems like there's a lot, a lot of pressure on O'Neill's shoulders. There's a tremendous amount of pressure. It's not an ideal way to start a new job. In retail, turnarounds take time because the product cycle is long. So, anyone who's expecting to see some quick wins, you know, I think you have to be patient here and give her a chance. But it's going to take, it's going to take a while. So, O'Neill started the job earlier this month. How's it all gone so far? Well, she did address the troops that first day. And obviously, you can imagine starting a new job. She's doing a lot of listening. She's going around meeting with folks. You know, she realizes there's urgency and she's not going to wait to act. She's got a plan and she's going to put it in motion. She hasn't shared what that is publicly yet, but the message was, I'm on it. At Lululemon's headquarters in Vancouver, on her very first day, O'Neill participated in a protest. She participated in a group activity with her new employees. A yoga class. Before we go, we want to hear from you. Is the economy affecting how you're going to vote in the midterms this year? What economic issues are important to you as you enter the polling booth? Send us a voice note to thejournalatwsj.com. That's thejournalatwsj.com. There's also a link to our email address in the show notes. That's all for today. Friday, September 25th. The Journal is a co-production of Spotify and The Wall Street Journal. The show is made by Catherine Brewer, Evelyn Fajardo-Alvarez, Pia Gadkari, Max Green, Sophie Codner, Matt Kwong, Colin McNulty, Jessica Mendoza, Laura Morris, Enrique Perez de la Rosa, Sarah Platt, Alan Rodriguez, Rodriguez Espinosa, Heather Rogers, Katie Shepard, Pierce Singey, Jeeva Kaverma, Catherine Whalen, Tatiana Zamise, and me, Brian Knudsen. Our engineers are Griffin Tanner, Nathan Singapak, and Peter Leonard. Our theme music is by So Wiley. Additional music this week from Peter Leonard, Bobby Lord, and Blue Dot Sessions. Fact-checking this week by Nicole Pasolka. Thanks for listening. See you on Sunday, when we'll air another episode from our recent live event in New York. So, you're not worried about hosting the whole family for the holidays? Why would I be? Wayfair had everything I needed to get the house holiday ready. What if Mike brings his cheerful dogs? My tree has tons of five-star reviews telling me how sturdy it is. But what if everyone's plus one brings a plus one? We'll see how extendable this extendable table really is. And extra chairs are on the way. Okay, what if there's a blizzard, and everyone has to sleep over? Ready to go with extra bedding and towels. From guest-ready essentials to holiday decor you can trust, Wayfair delivers. 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