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*(*[*I made fun of LULU the last time*](https://www.reddit.com/r/ValueInvesting/s/nMRP0h3tTV)*, so as penance, I am sharing what is happening right now)*
Lululemon’s New CEO Is Already in the Hot Seat—and She Hasn’t Even Started
[https://www.wsj.com/business/retail/lululemons-new-ceo-is-already-in-the-hot-seatand-she-hasnt-even-started-22fd1a39](https://www.wsj.com/business/retail/lululemons-new-ceo-is-already-in-the-hot-seatand-she-hasnt-even-started-22fd1a39)
Longtime Nike executive Heidi O’Neill is set to take over in September, and investors aren’t happy
\- Lululemon’s appointment of former Nike executive Heidi O’Neill as CEO backfired, causing shares to fall 13% on the day of the news and drawing criticism.
\- Investors and founder Chip Wilson critiqued O’Neill’s Nike tenure and the four-month delay before she starts due to a noncompete agreement.
\- The CEO announcement has intensified an ongoing proxy fight with estranged founder Chip Wilson.
Lululemon’s LULU -0.33%decrease; red down pointing triangle board members were under pressure. The company’s estranged founder had launched a proxy fight, with a big-name activist investor waiting in the wings, and the board was being pushed to quickly recruit a new chief executive who could turn things around.
When Lululemon landed on former Nike executive Heidi O’Neill for the job last week, Chairwoman Marti Morfitt and the board thought they had it in the bag. But the pick backfired spectacularly.
Lululemon shares tanked, falling 13% the day of the announcement, and they have declined further since. Wall Street analysts critiqued her tenure at Nike, and investors complained that she wouldn’t be starting the new job for more than four months, leaving the struggling company without a permanent leader at a vulnerable time.
Lululemon said in a statement that O’Neill has the full support of the board, which remains confident that her proven track record and operational expertise make her the right choice to lead the company.
Days after naming O’Neill to the CEO job, Lululemon announced a new board member: former senior Unilever executive Esi Eggleston Bracey. She will replace Colgate-Palmolive Chief Operating Officer Shane Grant, who had been a target of Lululemon founder Chip Wilson.
That announcement was seen by some as a way to try to contain some of the damage, but it made some investors—including Wilson—more furious. He has since said that the company replaced one “bean counter” with another. The addition of Bracey to the board was unrelated to the CEO announcement, according to a person familiar with the situation.
Lululemon has been wading through turmoil for over a year, facing the public attack from Wilson and additional scrutiny from activist Elliott Investment Management.
Wilson has been agitating for a board overhaul, and The Wall Street Journal has reported that Elliott was looking to help the retailer find a new leader. Both believe the business is challenged and the brand mismanaged, with sales in North America declining. The last CEO, Calvin McDonald, departed in January.
‘Not a tuneup. It is a turnaround.’
O’Neill carries the weight of a Nike resume, but also some baggage.
The longtime Nike employee worked there for over 25 years, most recently as president of consumer, product and brand. Under her watch, Nike doubled down on its direct-to-consumer approach, cutting out partnerships with retailers like Macy’s and DSW, a move largely seen by former executives and investors as the main reason for Nike’s current struggles. Nike is still undoing much of the fallout from its direct-to-consumer push.
After O’Neill’s departure, Nike split up her role into three separate positions.
In announcing O’Neill’s appointment, Lululemon highlighted how much global scale she helped achieve at Nike. That didn’t sit right with some analysts, who have countered that fixing the U.S. business should take priority over global growth.
“This is not a tuneup. It is a turnaround,” said Bill Campbell, director of research at Paragon Intel, a management research and analysis company. “The mandate is to fix North America, restore full-price discipline, reignite product newness, and put energy back into the brand. O’Neill may help stabilize the business, but she does not look like the obvious architect of the deeper reset this moment demands.”
Other analysts are more upbeat. “She brings a significant breadth of knowledge in women’s performance apparel and her experience accelerating speed-to-market is particularly welcome at lululemon where lead times have ballooned to about 24 months,” said William Blair analyst Sharon Zackfia.
Analysts and investors will have to wait several months to see what O’Neill brings to the table. She has a noncompete agreement with Nike that means she can’t start the job until Sept. 8.
In the meantime, the company is being run by interim co-CEOs Meghan Frank, who is the finance chief, and André Maestrini, the chief commercial officer. In March, Frank told investors that the company was working on fixing its U.S. business. “A top priority for the management team is returning to full-price sales growth in North America,” she said, explaining that the company was adding more new products and rebalancing its inventory to reinforce its premium positioning.
A Lululemon investor said they’ve been disappointed that the company hasn’t made any major changes under the co-CEOs, and aren’t expecting any to come until O’Neill is able to take over and get her arms around the business.
Wilson, in a letter to shareholders Wednesday, pointed out that the company would be without a permanent CEO for nearly 300 days, a decision that he said “escapes logic.” He said he hoped that O’Neill would be the right person for the job, but added that her long tenure at Nike “is not the symbol of transformative, creative-first leadership.”
Wilson and O’Neill have exchanged messages since the news of her appointment, according to people familiar with the matter.
Other CEO options on the table
Some big investors were pressuring Morfitt, who helped run the search for the next CEO, to move quickly. They felt the board wasn’t grasping the urgency of the company’s problems and the need to move fast to turn the business around.
Executive search firm Korn Ferry conducted the CEO search for Lululemon. Other candidates under consideration in addition to O’Neill included Jane Nielsen, the former chief financial officer of Ralph Lauren, whom activist Elliott Investment Management had been pushing for the role.
Elliott took a stake worth over $1 billion in the company as it tried to help facilitate a turnaround after McDonald’s abrupt departure, the Journal reported in December.
Nielsen underwent an extensive interview process for the CEO job that lasted a few months, people familiar with the matter said. Nielsen had also been in discussions with Wilson about potentially joining his board slate, before she joined Elliott’s campaign to be CEO, according to people familiar with the matter.
Other names circulating included Arctery’x Equipment CEO Stuart Haselden. He had previously spent five years at Lululemon in roles ranging from finance chief to chief operating officer before leaving in 2020. Another name floated was Abercrombie & Fitch CEO Fran Horowitz. But it would have been too costly to buy her out of her existing contract with the apparel retailer, some of the people said. Neither Haselden nor Horowitz ultimately interviewed for the position, according to people familiar with the search.
The Lululemon investor said that some shareholders were worried that a Lululemon insider was going to be tapped for the job, so O’Neill’s appointment was seen as a positive. But there also might have been some overly wishful thinking that someone with a bigger profile on Wall Street and more turnaround chops would end up as the next CEO, resulting in disappointment with O’Neill, the investor
O’Neill’s appointment comes as Lululemon is engaged in a nasty proxy fight with Wilson, who has nominated a slate of three directors and argues that the company needs to refocus on its core values of creating innovative, premium activewear inspired by its muse—the Super Girl, a young, educated, working woman who is a trend setter.
Wilson and Lululemon have attempted to settle their differences privately and prevent their very public fight over board seats from going all the way to a shareholder vote. He and his financial advisers offered a three-year standstill deal in exchange for his three board seats, Wilson said in his letter to shareholders. Wilson’s three board nominees were also interviewed by Lululemon as it considered them for seats, the company said in a proxy filing this week.
The company has argued that Wilson kept moving the goal posts on the terms of a potential settlement. Wilson says the board was seeking to have him put millions of dollars into an escrow account to cover a “hypothetical, potential future breach of the nondisparagement” clause.
Lululemon hasn’t yet announced a date for its annual meeting.
But a resolution seemed to move further away after O’Neill was named to the top job. Wilson is turning the heat back up.
“All the roads of lululemon’s value destruction lead back to one place: the Boardroom,” he wrote to shareholders. “This all comes back to the Board’s inability to understand the core drivers of the brand’s premium positioning and success.”
When the company named O’Neill as its next CEO, Morfitt highlighted her vision and her three decades of experience in the retail sector.
“We were thrilled by \[the\] candidates we saw,” Morfitt told the Journal in an interview the day the news was announced. She described the candidates as “very high caliber” and said “many of them said they would not make a move except for this one.”
O’Neill stood out as “the clear choice to serve as the company’s next leader,” she said.