The company reports earnings on March 27, with a decent short interest and plenty of excuses, new management, weather, it appears ripe for a surprise pop. Sentiment is surely near an all-time low too. So if you’re Nike (NKE) or Under Armour (UA), you might want to act now because this deal may not last forever.
While LULU reached in excess of $80 a share last year, takeout talk was rampant. It made some sense, LULU offers a premium product in an area that neither Nike or Under Armour has explored aggressively. Certainly both have the resources to launch a similar line themselves, but at this price, taking out LULU may make more sense.
Now sitting with market cap of around $7 billion, to say LULU could be acquired by NKE ($70 billion) or $UA ($13 billion and growing by the minute) is like saying an elephant could handle a few bags of peanuts at a ball game. Just as one example, Nike’s current inventory is valued at about half of LULU, the ENTIRE company. But which giant is the better fit?
Nike could offer a stock and cash transaction that would do little to make a dent in a stellar balance sheet. Debts only total about 10% of the value of the company and the management has over $2 billion in cash at its’ disposal. They could “swoosh” in and buy it on a whim but why? Nike certainly resonates with female customers, though not in the yoga space. Perhaps for a retail presence? Nike Factory Outlets abound but there are few premium Nike retail spaces. Conversely while the Lulu footprint is not large, stores typically sport sizable square footage. How about a pair of sneakers with those yoga pants Miss?
One would also think Nike could streamline Lulu’s distribution, which has been a problem and improve what are already nice margins. They would essentially be buying a quality name on sale, while at the same time picking up some retail space for their existing product lines. They might be getting some pressure from Gap Stores (GPS) Athleta brand who has plenty, maybe too much, retail space to poke away at Nike and Under Armour as they expand their brand.
Now take Under Armour, why should Kevin Plank pull the trigger? Why not? Under Armour’s valuation has increased 50%, thats 5-0, seemingly overnight. With a 2-1 stock split on the horizon, the company will have lots of good will for a acquisition but existing and new investors need growth, Lulu could give it to them in the future.. Additionally, Lulu’s retail footprint would have given Under Armour a nice launching pad for “Speedform Apollo” their new running show which debuted at the end of February. It was hard to find at retailers, but looks like it could steal share from Nike and other competitors. It’s also the first sneaker made exclusively in a clothing factory. How convenient, so are yoga pants.
Under Armour also doesn’t have the same female customer base that Nike enjoys, it’s starting to gain share there, but the original marketing dating back over 10 years now didn’t exactly harken sunshine and rainbows did it? This seems like an easy way to introduce your brand to a new audience while giving their current clientele a look at a new line, which is actively seeking men in Lulu.
Either company is a pretty good fit, both would solve Lulu’s recent issues, quality management of product and bad publicity courtesy of a floundering founder. He disappears into the night if the company is acquired. Problem solved.
Bottom line, with the company still near its’ recent lows, a LULU acquisition seems plausible and might provide a floor under the stock at the recent lows. Keep an open mind, it may not be such a stretch.
At the time of this writing I had no position in any stocks mentioned.