So you're telling me there's a chance?
Dumb & Dumber is one of my favorite movies, and one of the best parts is near the end, where Llyod is asking Mary about the chances that the two will end up together as a couple. She responds with, "not good," and later clarifies with, "I'd say more like one out of a million." And Lloyd responds with, "So you're telling me there's a chance. YEAH!" It can be found here for a good laugh.
And that about sums up the chances of Dana Blankenhorn's rehashed two-year old idea of Under Armour (NYSE:UA) (NYSE:UA.C) buying Lululemon (NASDAQ:LULU) coming to fruition - a deal that Dana asserts should occur because UA now needs LULU. While he pointed out that the merger could be "a match made in athletic heaven," he also noted it's a stretch… one that I would assert is likely to bust the seams of yoga pants and create some sights that cannot be unseen. On paper, the companies could integrate technologies, designs, and logistical efforts to be a combined leader in athletic wear. He even went so far as to note that they should make the purchase after LULU's earnings report which came out this week.
But three major stumbling blocks keep this deal as likely as Lloyd and Mary: first, financing would have to be extremely creative in a way that would be very unlikely to benefit shareholders, at least in the near term, and thus lack approval. This is even more the case now that LULU's earnings did not drop the stock, but instead swelled its price upwards nearly 5%. But I am not going to cover that, because to even reach that phase, UA would have to truly need LULU, which is questionable at best. And third, the cultures would have to mesh like the tightly woven fabric of a UA shirt... which they don't.
UA needs LULU?
So why would UA need LULU? The basis is that it would fill a couple of gaps: the female market and the loss of sales from Sports Authority's demise, and in turn make them more competitive with Nike (NYSE:NKE). The female market is sizeable and LULU is strong in it, no doubt. But would LULU under UA ownership continue this hold, and would UA want to buy it at a premium price? And is a yoga culture where UA really wants to take its game, especially when LULU is more focused on "healthy living" sports (yoga, running, free-spirited happiness through sweat)? UA has not directly focused on this line, and doing so now would be like trying to introduce new coke to a successful product line. And it's not like UA is not growing its women's e-commerce sales significantly faster than its men's line, topping $1 billion in women's apparel sales this last year, and added 275 women's sale points this last year across department stores channels like Macy's (NYSE:M), Bon-Ton (NASDAQ:BONT) and Bloomingdale's.
Second is Sports Authority, which some analysts seem to view as a binary outcome in that the store closures will be a complete loss of all sales. But while some consumers may switch brands or choose to wait on buying additional UA clothing, many will switch to alternate retailers such as Dick's Sporting Goods (NYSE:DKS) and Champs, or they will look to buy UA online or at a regional outlet. It is going to have an impact, and I was surprised to see UA's initial announcement of no foreseeable issues. However, I do see its recent reassessment as likely a "worst-case scenario" with possible upside to expectations at the next earnings report.
Third, there seems to be a misinterpreted attitude that coexistence of UA and NKE cannot continue, and that NKE will not let UA steal more market share. But this assumption ignores the fact that athletic apparel sales continue to rise worldwide, and thus both companies are growing together - it's not zero sum. In this tough environment, UA is still making great strides in the shoe market and continues to grow in the 20%-plus range. Until the market is matured and saturated, which Morgan Stanley noted will likely not happen for a fair number of years, NKE is more likely to market to new customers of this apparel rather than try to expend additional resources and steal market share. While smaller firms may be getting hit and other luxury brands bring out their own lines, UA and NKE will almost certainly remain leaders in their perspective markets alongside one another... as will LULU when it comes to high quality yoga apparel.
Culture: The Barbarian and the Princess
Culture I see as being a significant sticking point - I can only compare the idea of this merger as the barbarian marrying the noble princess. It looks good on paper, might produce some great off-spring, but is likely to result in more discord than beneficial gains for both parties as they stand for very different life goals.
UA is known as the clothing line for selling to people who want to sweat in a competitive nature, a nature that focuses on training to win, not for personal harmony. You don't sponsor world-class athletes who lose or come in consistently 2nd or 3rd; you sponsor winners because that is your brand. It's about destroying your foe in a game of friendly strife (sometimes not so friendly depending upon the sport). And if you lose, UA's attitude is that you get up, dust yourself off, towel away the sweat, and train even harder to be victorious in the next match. Winning and being better every day is what matters, and the company focuses on innovation to ensure its athletes can win with the best apparel and tools available.
Courtesy UA Website
LULU on the other hand focuses more on harmony through sweat to celebrate life, healthy living, and living a life of possibility. It is the "princess' ideal" of happiness through balance and harmony. You sweat to feel good, to find an inner peace through a community founded on a clothing line's ideals. And its stores are set up in this fashion, so that customers can come in and discuss their passions. And it focuses on this manifesto below, which transforms with the thoughts and goals of its customers. Take a look at some of the phrases that illustrate the LULU vision - would you ever see these on anything in UA's culture?
Courtesy LULU Website
But even more so with the culture is the issue of how you would even integrate the brands. One commenter in Dana's article supposed an option:
But is this something that could really be plausible? LULU's store charm is what generally attracts customers, along with the numerous studios it has included that offer yoga classes. Putting LULU items into a UA store could cause more harm than foul as the price and brand differences could confuse customers, and it would likely require separate sales reps. It is also a plan of hopes built on the idea of, "if you build it, they will come."
And UA retailers are unlikely to take on and attract LULU customers as well - remember that charm of a LULU shop? That does not really transfer well to a Dick's Sporting Goods. Plus, the price range of LULU gear would likely limit sales. Of course, UA and LULU could just keep the status quo and sell under separate brands, which might be the most plausible choice as one main fund could pay for expansion of both names on a global basis.
Additionally, if a merger were to occur, culture class would not just be limited to company values and the way stores market product, but also in leadership. Kevin Plank is simply a solid CEO and leader who has influenced UA's success first-hand. And while Chip Wilson has given kudos to UA and NKE, and specifically props to Kevin Plank, his recent shenanigans with LULU's board would likely be a thorn in a merged brand's side. One can assume he would immediately demand a seat on the board and want to influence UA-LULU's decisions, but do you want someone in a position of power who is known for putting his foot in his mouth and was Chairman of the Board through the whole 2013 "Sheergate" debacle several years back? I for one would rather keep Plank away from unnecessary noise, and Chip would be just that in a leadership role of any merger which would muddy the waters.
But there's always a chance…
So, I will conclude by saying that just like Dumb & Dumber, Lloyd does have a chance with Mary, just as UA might with LULU. But the chances are very slim. Both are solid companies, but require a need to merge and an actual vision that works past the cultural divide. Right now, that need is just not present as the market has yet to mature or saturate in this area, and until then, each will keep marking out their niches. So if you are looking at LULU as a potential for a takeover, the chances remain slim to none, and at a 52-week high with the recent report, it may be wise to await a better entry (I have no LULU position and have not for several years). As for UA, I remain long with covered calls sold on shares that are substantially out of the money. I also continue to buy the stock at its current price on a weekly basis for the LONG TERM.
As a final word, if you enjoyed the article, consider clicking the follow button at the top next to my name. I tend to write 2-5 times a month, but only when I have an idea that can add to the SA conversation. With that said, I do have two nearly 6-month-old twin boys at home, so sometimes I have a period with little production such as this past month. As always, thanks for taking the time to read, and until next time, Cheers!
* While my investing style and choices work well for me, each individual investor has his or her own goals/style and should do their own due diligence.
Disclosure: I am/we are long UA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.