On Tuesday, shares of Lululemon rose $1.21, or 1.6 percent, to $78.62 following the abrupt resignation of its CEO, Laurent Potdevin, due to an unidentified misconduct.

Lululemon’s shares benefited from a rebound in the stock market with the Dow Jones Industrial Average climbing 567 points on Tuesday after two days of heavy losses. But some analysts had issues with the way Potdevin steered the company. The majority also felt the company remained in good hands, led by Glenn Murphy, the former head of Gap Inc. Analysts were also comforted that Lululemon reiterated its healthy recent guidance.

In explaining Potdevin’s departure, Lululemon said in a statement issued just after the market closed on Monday that it “expects all employees to exemplify the highest levels of integrity and respect for one another, and Mr. Potdevin fell short of these standards of conduct.”

According to a regulatory filing, Potdevin will receive a payment of $5 million, including a lump-sum payment of $3.35 million and other $1.65 million to be paid in equal amounts over 18 months beginning 60 days after the separation date. Potdevin agreed to a release of claims in favor of Lululemon, a 24-month non-solicitation period, a covenant not to sue and a covenant of future cooperation.

Lululemon’s board immediately began a search process “for a proven and highly-experienced global chief executive officer” while the yoga-themed retailer also announced a number of  organizational changes to support the transitional period:

  • Glenn Murphy, chairman of the board, will take the interim helm as executive chairman;
  • Celeste Burgoyne, EVP, Americas, will oversee all channel and brand-facing aspects of the global business, including stores and e-commerce, as well as brand marketing;
  • Stuart Haselden, COO, will have responsibility for all operations related to finance, supply chain, people and technology;
  • Sun Choe, SVP of merchandising, will guide all aspects of product development, design, innovation and merchandising.

Murphy reportedly has no interest in becoming long-term CEO, and the search for a new CEO is expected to take six to 12 months.

Lululemon also reaffirmed its updated guidance provided on January 8, that reflects the ongoing momentum of the business. In addition, the company’s growth strategies remain on track to achieve $4 billion in revenue in 2020.

For many analysts, Potdevin’s departure was seen having a minimal impact on Lululemon.

In a note, Cowen reiterated its “Outperform” rating on Lululemon given the retailer’s “innovation pipeline in place, strong existing leadership and Glenn Murphy’s new expanded role as Executive Chairman.”

Murphy, who joined the board in 2017, is best known as chairman and CEO at Gap Inc. from 2007 to 2014. Previously, he was chairman and CEO of Shoppers Drug Mart Corporation and held senior leadership roles at Loblaw Companies. He currently is the founder and CEO of FIS Holdings, a consumer-focused investment firm deploying a combination of operating guidance and capital flexibility.

Oliver Chen, the lead analyst on Lululemon at Cowen, wrote that Murphy “has a good balance of supply chain expertise, merchandise execution and stores + digital integration.”

Chen also highlighted that Lululemon’s Whitespace innovation laboratory, led by Tom Walker, remains staffed by 60-70 people and is “a catalyst for ongoing product development, and an important factor in maintaining regular product and fabric newness.”

Finally, Chen wrote that Lululemon’s board will likely look for someone with a proven track record, global retail experience and strong brand management expertise to replace Potdevin. Chen wrote in the note, “We believe a new hire could likely come from the consumer products and/or luxury sectors, given LULU’s need for someone who understands both the mechanics and creativity necessary for brand evolution. Our take is that a new hire will also need a keen appreciation for LULU’s unique culture, store and grassroots leadership teams, and mindful way of life.”

In a note, Matthew Boss at J.P. Morgan noted that Potdevin’s resignation follows “a volatile four-year tenure as CEO, which began in January 2014 and included multiple miscues, most recently the failed e-comm platform transition in mid-2016 and product missteps in 1H17.”

He also noted that Potdevin was appointed CEO in January 2014 from TOMS by the company’s former founder Chip Wilson prior to Advent taking board seats in August 2014, with Glenn Murphy appointed to the board in April 2014. Boss added, “A key point versus other recent lateral CEO resignations is Potdevin was not the face of the company nor founder of Lululemon, limiting customer facing business risk in our view, with Chairman Murphy confident the board will find a suitable replacement in a timely manner with the current CFO-search process ‘wrapping up nicely.’”

Boss also has confidence in Murphy, who noted in a conversation with J .P. Morgan’s team that Lululemon’s new management structure with the three senior leaders bearing added responsibilities is similar to his last year at the Gap Inc. and “focused on maintaining to accelerating current business momentum keenly focused on meeting or exceeding the outlined 2020 targets while providing a sounding board for three of the company’s top talents (but not getting in their way).”

In terms of finding a replacement, Boss expects the connections of Murphy, as well as former PE sponsor and top shareholder Advent, board members Tesla and SNAP, as well as an outside search firm, will all help find a high-quality candidate. Boss also noted that Murphy’s compensation agreement is tied to stock performance to help align the executive chairman’s interests with those of shareholders. Boss has an “Overweight” rating on the stock.

Jim Duffy, the lead analyst for Stifel in the space, described the departure as “awkward and somewhat unexpected,” but it doesn’t change his firm’s view on Lululemon’s fundamentals or its investment stance. Stifel has a “Hold” on the stock.

In a note, Duffy pointed out that Potdevin joined Lululemon as CEO in January 2014 after the departure of Christine Day, its CEO from 2008 to June 2013, and he also noted that Potdevin underperformed at points in the role.

“Following Mr. Potdevin’s much maligned first impression with investors at the 2014 Investor Day, results under his leadership have been volatile,” wrote Duffy. He noted that although shares have been “strong recently,” they’ve underperformed the S&P for the four-year period under Potdevin’s leadership.

Duffy also feels that with Potdevin foregoing an appearance at the ICR Investor Conference in early January, a search for a new CEO may have started prior to the announcement. Wrote Duffy, “Leadership transitions can be difficult, though Chairman Glenn Murphy and CFO and COO Stuart Haselden provide continuity through the search process.”

In a note, Canaccord Genuity’s Camilo Lyon wrote that a likely candidate is Stefan Larsson, the former CEO of Ralph Lauren Corp. from November 2015 and May 2017. He left that company after reportedly clashing with founder Ralph Lauren, but earned praise from Wall Street. Prior to Ralph Lauren, Larsson ran Old Navy.

“In our view, the lead candidate is Stefan Larsson, the former CEO of Ralph Lauren,” wrote Camilo Lyon, Canaccord Genuity’s lead analyst. “Mr. Larsson’s one-year non-compete ends on May 1, 2018.”

Canaccord Genuity has a “Hold” on Lululemon’s shares.

Susquehanna continues to rate Lululemon’s shares “Positive” following the news.

“We are confident that the evolution of Lululemon over the past four years provides a strong foundation for the next CEO,” wrote Susquehanna’s lead analyst Sam Poser. “We also believe that finding a qualified CEO will not be as onerous as it was in 2013, as Lululemon’s founder, Chip Wilson, is no longer involved in the business.”

Photo courtesy Lululemon