Shares of Lululemon Athletica rose slightly on Wednesday as Wall Street analysts unanimously applauded the hiring of Calvin McDonald, the CEO of the Sephora cosmetics chain, as its next CEO.
McDonald, who is 46 and will join Lululemon on August 20, earned credit for his success over the past five years guiding Sephora’s double-digit growth while expanding the chain’s product offerings, implementing new digital platforms and store experiences, and expanding into Brazil and Mexico.
Owned by French luxury goods conglomerate LVMH Moët Hennessy Louis Vuitton, Sephora has particularly earned recognition for its innovative launches that drive personalization through digital connections. The innovations include:
- Sephora’s Virtual Artist, which enables customers to virtually try on products from multiple categories, all from their mobile device.
- The Beauty Insider Community, a digital platform launched in 2017 that enables beauty enthusiasts to connect with each other, find inspiration, ask questions and get recommendations.
- Sephora’s Store Companion tool that allows customers to use their mobile phones at the store level to find information such as product recommendations, items users have previously browsed and their beauty profile.
- Sephora’s Digital Skincare and Makeover Guides that allow store associates to capture products used or recommended during a service and send them to clients for future reference, along with videos and before-and-after pictures.
- The Sephora Skincare Advisor that enables shoppers to use the Google Home voice assistant to book appointments at Sephora stores, listen to podcasts on beauty news and take beauty quizzes through the app.
Market watchers will be eagerly watching how many of these innovations translate to Lululemon.
Culturally, a few analysts said the fit at the yoga-themed chain appears solid in part because McDonald is a triathlete and he ranks among the highest CEOs on Glassdoor, the website that lets former and current employees review and grade their companies and CEOs.
The yoga-themed retailer’s former CEO, Laurent Potdevin, resigned in early March reportedly due to an inappropriate relationship with a female designer and accusations of favoritism in creating a “boys’ club” atmosphere.
Beyond addressing any workplace shortcomings, McDonald will be tasked with driving growth in digital, international and men’s while continuing Lululemon’s sizzling momentum in recent quarters as management has overcome a number of product and supply chain missteps over the last few years. In the first quarter, comps soared 20 percent or 19 percent on a currency-neutral basis.
The stock has risen some 60 percent since the exit of Potdevin. On Wednesday, shares of Lululemon rose $2.05, or 1.7 percent, to $125.03.
Lululemon Executive Chairman Glenn Murphy is expected to shift back to serving as non-executive chairman and will assist with the leadership transition. The three executives who ran the company since Potdevin’s exit, Celeste Burgoyne, Stuart Haselden and Sun Choe, will report to McDonald.
In a note sent on Tuesday night, JPMorgan analyst Matt Boss said his team had talked to Murphy and JPMorgan only sees McDonald building on recent hires that are elevating Lululemon’s executive team.
Boss wrote, “On the qualitative front – today’s high caliber hire at the helm accelerates the turning of the tide at LULU in our view with the management bench moving from a point of investor contention to among the Best-In-Class across our coverage with a CEO from Sephora/LVMH, CFO from VF Corp, COO from J Crew, Sun Choe at CMO (hired 11/2016), three seasoned regional heads in place (Americas, Europe, Asia), and Chairman of the Board Glenn Murphy remaining a key advisor to the team.”
On McDonald, Boss noted that Murphy particularly believes McDonald will help with its high international growth ambitions. Boss wrote, “While McDonald hasn’t owned an international country P/L on his own, he brings international country experience (i.e. South America) and a global mindset learning under a ‘travel and meet’ strategy at LVMH. We see this background complementing LULU’s existing talent base w/ strong market leaders in place across Europe & Asia today in addition to Celeste Burgoyne heading the Americas.”
Other attributes called out by Murphy to JPMorgan include McDonald’s success in driving innovation at Sephora with expanded product offerings, elevated in-store and online experiences, and developing a highly-touted loyalty program. Wrote Boss, “In our view, LULU stands to benefit from this background given innovation is a key differentiator for LULU vs the rest of athletic.”
Digitally, Sephora achieved a “core competitive advantage” with its vast mobile offerings and online prowess that should particularly aid Lululemon’s recent success online after a slow start. Boss noted that Lululemon nets about 22 percent of its sales from digital and has the potential to reach the more than 40 percent penetration being seen by specialty-store leader in digital, Urban Outfitters, with much higher accompanying margins than sales at the store level.
Finally, Boss said Murphy told the JPMorgan team that McDonald brings “best in class leadership experience w/ the structure positioned for COO Haselden, EVP Americas Burgoyne, and SVP of Merchandising Choe reporting directly to him. Importantly, the board saw him as a great cultural fit who understands what makes this business work — he loves the brand, he wears the brand, and is an avid triathlete.”
JPMorgan has an “Overweight” rating on Lululemon with a price target of $133.
At Cowen, John Kernan agreed that McDonald “should fit Lululemon’s culture nicely” as McDonald is a committed triathlete while also ranking as Top CEO in Beauty on Glassdoor in 2017. Kernan wrote in a note, “Mr. McDonald focused on creating a collaborative and innovative culture inside Sephora with close connections to his employees. As an avid triathlete, Mr. McDonald clearly has a competitive streak and focus on health and wellness. Mr McDonald is a married father of four.”
Kernan further described McDonald as a “a leader in product innovation, digital and store experience,” and also pointed to his 20 years of retailer experience, including his former job as president of Sears Canada and a number of management positions at Loblaws, Canada’s largest retailer.
Cowen has an “Outperform” rating with a price target of $137.
Matthew McClintock, at Barclays, wrote in a note, “Under Mr. McDonald’s leadership, Sephora expanded in global markets including Brazil and Mexico: Upon his appointment at Sephora, Mr. McDonald’s focus was on building on the growth of the business in new and existing markets. We view this positively as a large part of LULU’s growth story relies on international expansion. The company continues to expand its international footprint with store openings in key markets around the globe as part of its plan to reach $1 billion in international revenue by 2020.”
Barclays has an “Overweight/Positive” rating with a price target of $150.
Sharon Zackfia, at William Blair, said the appointment of McDonald “looks like a good hire,” pointing to his many accomplishments at Sephora as well as his ranking as Glassdoor’s Highest Rated CEO designation in 2017, with a 93 percent approval rating from employees.
Zackfia wrote, “Importantly, Mr. McDonald likely fits the bill of a CEO that will broaden the path that Lululemon is already on rather than shift the course of the company. He appears to be a good cultural fit and leader based on his Glassdoor reviews, and he boasts a strong background in omnichannel retailing at Sephora (estimated at over 20% of sales e-commerce, versus competitor Ulta’s 10%). Moreover, his experience as a leader in a business unit of LVMH should have exposed him to a wide bandwidth of luxury lifestyle brands on a global scale.”
William Blair has an “Outperform” rating on Lululemon.
At Stifel, Jim Duffy believes McDonald may lack some international expertise with Lululemon’s many expansion efforts taking place globally, but he largely joined the crowd in praising the selection of McDonald.
Duffy wrote, “We believe Mr. McDonald’s successes as head of an image-led, consumer-centric business such as Sephora renders him a well-qualified leader for lululemon. Sephora has distinguished itself for its experiential retail, digital and mobile capabilities, and social community, all of which should translate to the lululemon business. Given the importance of retail traffic to the business model, Mr. McDonald’s expertise in experiential retail could prove particularly valuable.”
He added, however, “At first glance, Mr. McDonald scores high on fit, performance, and areas of expertise, though falls short on LULU’s call for an experienced global leader, as his leadership history has been focused in the Americas region. Overseeing the international expansion of LULU’s retail and digital business will be a new challenge, and opportunity for improvement.”
Duffy did note that Lululemon’s executive team appears to be “solidifying” with the hiring of McDonald as CEO coming on top of the hiring of Patrick (PJ) Guido as CFO in April of this year. Previously, Guido was treasurer and VP of corporate development at VF Corp.
Duffy still has a “Hold” rating with a price target of $113 due to the stock’s “rich valuation,” dependence on retail traffic to drive any upside to estimates, and more difficult comparisons arriving. Wrote Duffy, “LULU momentum through 1H18 appears to have more substance than just easy compares against operational and product missteps in the prior year, though the premium multiple (32.5x our FY19E EPS estimate of $3.78), and reliance on retail traffic for upside to estimates leave us sidelined.”
Photos courtesy Lululemon, Sephora