Shares of a company typically soar after a buyout or merger is announced. The acquired company’s price usually reaches how much the buyer is paying per share, which is a great way for investors to make a return. Though it is profitable, it's not easy to predict which company is likely to be bought.
Fortune predicted last November that Lululemon Athletica Inc., LULU, the Canadian-based athletic apparel company, was one of eight companies that might be bought out in 2017. After the company reported its fiscal 2017 fourth-quarter results, the prediction might be fulfilled.
The yoga-inspired sportswear company plunged in late March after its Q4 results revealed an earnings miss and flat growth for the upcoming financial quarter. Shares of the company dropped over 20% since its earnings release on March 29.
While Lululemon’s fourth-quarter earnings fell short, both sales and earnings improved year-over-year.
The key reason for the decline in investors’ confidence was in the soft outlook for the upcoming quarter. Management said it “had a slow start to 2017,” due to lack of color in its recent product line, which weighed on e-commerce sales.
Despite the sluggish start to 2017, LULU remains positive on its outlook for fiscal 2017 and its goal to reach $4 billion in sales by 2020. Furthermore, Stifel Nicolaus analyst Jim Duffy upgraded Lululemon to a Buy from Neutral, believing that its e-commerce and merchandising issues will only be temporary.
Lululemon is growing, but just not as much as what investors and analysts had hoped. With the drop in value, the company may become an attractive target in the active wear sector for large corporations like Nike NKE or Under Armour UAA.
While Nike, a giant in the sportswear sector, is more likely to be the buyer, Under Armour could strive for an acquisition or merger if the opportunity presents itself.
Currently, Under Armour is struggling to post sales growth that satisfies its investors. Not only would buying Lululemon increase its sales growth, but it would also provide Under Armour with a much-needed boost in female customers..
However, it could wind up working out differently for Lululemon and Under Armour. Talking to CNBC, Chip Wilson, the founder and former CEO of Lululemon, recently instructed the Canadian yoga wear company to buy Under Armour.
Wilson, still the largest individual shareholder of Lululemon, believed that now is a good time to buy Under Armour, as the company’s sales are slowing down.
For similar reasons, the buyout or merger would be able to increase Lululemon's revenues significantly and grow its menswear section.
Perhaps a merger will soon happen between the two as both retailers look to compete against industry leaders like Nike and Adidas Inc. ADDYY.
Lululemon is up 1% to $51.73 per share in afternoon trading Monday.
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