Lessons from the IPO

Going public was another critical juncture that affected the future of lululemon. Again, for those of you who might be in this position in your own lives, I would like to share what I learned.

Have each prospective director explain their theory as to what type of CEO is needed at each growth stage of the company. (Oversight of companies drastically changes as revenue and employee base grow). I didn’t control the Board, so I should have nurtured and selected my own people to fill Board positions and not let PE do it.

A founder with more than 10 percent of the company will be a “dependent” director. The other directors are deemed as “independent” to ensure the founder-director does not control the company decision making, and these independent directors will elect a lead director. The lead director is essentially the chairman as he or she represents more board votes. Giving the chairman title to the founder is often nothing but smoke and mirrors.

If the CEO and founder do not see eye to eye on vision or operations, a strategic CEO can divide and conquer a board by marginalizing the “dependent” founder from the “independent” board members.

A staggered board where only three directors are up for election each year does not allow directors to change with the speed at which the world changes. Directors get stale fast and nepotism and mediocrity can set in quickly.

Becoming American

A final step in the process of going public was officially making lululemon an American company. We registered our business in Delaware. It took me years to understand why this was important. The value of lululemon would be dictated by the demand for its shares. The Board wanted to give investors the confidence they needed to buy into lululemon. If lululemon was an American company, under American regulatory laws, it provided assumed security for potential investors. This never made sense to me. Canadian corporate taxes had always been less than those of the US (until, of course, Trump changed the tax rates in 2018 to favour American companies).

Going Public

At nine thirty on the morning of July 27, 2007, I stood on a riser at the NASDAQ Exchange in New York City. Beside me were my family, an assortment of our core staff, and our new Board of Directors. I took a breath and pressed the button to ring the bell. We’d done it. We’d taken lululemon athletica public.

“I always kind of joked that lululemon was like the sister we never had,” my son JJ recalls. “And growing up, I always kind of thought, ‘Well, my dad owns and runs a women’s athletic apparel, yoga-based business. And that’s what he does every day. He gets up, and he goes and makes little black stretchy pants.’ I kind of had an understanding, eventually, of what was occurring. It was part of my life growing up. The IPO happened when I was 18.”

The day of the IPO was huge for us, but I felt as if I’d already experienced it. An entrepreneur is easily able to put themselves five to 10 years into the future. They build into the future, and not for the present, so I had envisioned this for lululemon already. It was akin to being a designer. A designer designs a garment but doesn’t see it come into the store until eight months later. By that time, the designer has long since moved on to future designs.

Almost as soon as the bell was rung, our stock jumped from its initial price of $18 to $25 a share.1 As planned, I now owned 30 percent of the company. We marked the day in a memorable way. We’d already arranged to shut down traffic in Times Square on the day of the 27th, which allowed us to stage a massive yoga demonstration right there in the centre.

The demonstration was Eric Petersen’s idea, and it went off perfectly. Eric would later share that the day of the IPO was among his proudest moments at the company. “Everyone at lululemon felt like they were involved in the process,” he commented. “It could have been a divisive time in the growth of the company, but it wasn’t.”

Lori Jane Budd, who managed our first store in NYC, says: “It was a very exciting time to be the manager of the only store in NYC with all the hoopla surrounding this giant step for the company. After having the thrill of watching the bell being rung, the excitement and traffic increased even more in the store. On the day of the IPO, a banker walked into the store on 64th and Broadway and said, ‘Who are you guys?! I just made a shitload of money off you!’”

Giving Back

I also wanted to do something for all of our employees, so we had every electronic billboard in Times Square displaying rotating pictures of everyone working in our stores. If you were working for lululemon at that time, you would have seen your face in Times Square. The whole thing brought the company together. It wasn’t just those of us down there for the IPO – it was a positive way of enrolling and involving everyone in the entire company in the experience.

July 27 also marked the fulfillment of a promise I’d made to the staff years before. When lululemon was much, much smaller, I’d told a group of our people that if we ever went public, I would give them 10 percent of my shares – which I did. This created 30 or so multimillionaires, most of them women (many of whom have since gone on to build their own businesses).

Coming to New York and experiencing the final stage of our company going public wasn’t just symbolic for our staff, it meant that they were now its owners.

The investing world seemed to believe in our new way of doing business. We had a successful formula that was producing the top retail metrics in the world.

Tall Poppy

I had no idea what going public would mean for my family and I. Lululemon and our Kitsilano community were home and family to us. I never thought I would become a sensationalized media heat score in the years that would follow.

The Media and Short Selling

Around this same time, I learned my first – but not my last – lesson in dealing with the media. I’d always been my own PR and brand manager.

Back when I was making technical apparel for surfing, skating, and snowboarding (followed by yoga a few years later), the press would come to me looking for an expert opinion on these markets. Westbeach used to receive free editorial coverage and never had to advertise. Also, everything that was published about my work had always been a good story, so when it came to the press, I’d gotten used to positive coverage.

I never had to be guarded in what I said.

The first time I was “set up” through a series of leading questions by a journalist was in 2007, right around the time lululemon went public. We were making a line of clothing called VitaSea, with an eco-friendly, seaweed-based technology called SeaCell. We’d found that using SeaCell fibres in the fabric of our shirts would make them anti-stink and would moisturize the skin of the person wearing the shirt. On top of that, shirts made with SeaCell just felt great to wear.

I was contacted by the New York Times who wanted to talk about the SeaCell technology.

“Well, have you had it tested?” the reporter asked.

“We get it from a supplier in Germany,” I told her. “We’ve got all the information, all the specs on it.” “How do you know it actually works?” she asked. “What kind of testing have you done?”

“We haven’t done any technical testing,” I said, “other than I wear it every day, and my wife tells me I don’t stink anymore. I also think the suppleness of the fabric is beautiful. I really love it.”

I didn’t realize how the statement could be manipulated … but then the article came out. The headline read: “‘Seaweed’ Clothing Has None, Tests Show.” Here’s an excerpt from the article itself:

Lululemon Athletica has been a standout performer on Wall Street since it went public in July, thanks to the popularity of its costly yoga and other workout clothes, which are made with unusual materials, including bamboo, silver, charcoal, coconut and soybeans. One of its lines is called VitaSea, and the company says it is made with seaweed . . . There is one problem with its VitaSea claims, however. Some of them may not be true.2

Basically, the New York Times was calling us frauds. When I read it, my first thought was that it seemed mean-spirited. Lululemon was all about love so I couldn’t imagine why someone would ever write something like that. I wondered if it was a case of tall poppy syndrome.

The negative article in the Times also provided me with insight into the game of short selling in the stock market. When the article was published, lululemon was at almost 60 times EBITDA, which is the very top end of stock valuation. When a company is valued for perfection, anything that goes wrong will drop the stock, even temporarily. I knew lululemon was very heavy on the short sellers. It naturally happens when a stock is priced that high. People will run algorithms on it and determine that the possibility of the stock dropping could be 80 percent. That’s the game.

If those prospective short sellers want to ensure profits, then the smart ones will manufacture a false story that will impact the stock. As an example, they might feed false information to interested journalists. The journalists, in turn, write high-profile articles that damage a company and cause its stock to drop, and the short sellers reap the rewards. There is a lot of money to be made on all sides.

It’s interesting to note that the Times even admitted they’d gotten the story from a short seller in that article: “The Times commissioned its test after an investor who is shorting lululemon’s stock – betting that its price will fall – provided . . . test results to The Times.”3 I’m sure many people made very good money off that stock drop.

Anyway, it didn’t take long for our stock to recover. Our overall numbers were among the best in the world, so the drop wasn’t a huge problem. In managing the bad publicity, David Mussafer from Advent Equity (who was on our Board of Directors) stepped up and did a phenomenal job. He’d seen this kind of thing before - Advent had so many public companies that he understood the game well. He understood how to get in, how to respond, and how to talk to the media in the right way.

Overall, with lululemon going public and the article in the New York Times, I recognized that the world had changed for me. I saw how easily salacious headlines could increase readership and sales. Even so, the incident didn’t change my willingness to engage with the media.

Board Structure

At the time of the IPO, Tom brought forward two possible, very experienced and successful directors. The first was Michael Casey, the ex-CFO of Starbucks. The second was Brad Martin, the ex-CEO of Saks. I couldn’t have been happier with the quality of people we had on our Board.

Michael Casey was elected by the independent directors to the lead director role. This was a nice balance, I thought, between the eight independent, financially-minded directors, and myself as a creative and visionary founder.

Michael once told me he took the same route to work every morning, so his mind could focus on what needed to be done that day. When I heard him say that, I chuckled under my breath. I took a different route to work every day. I always wanted to see how the world was changing around me. It seemed we had a nice balance of expertise. Our nine independent directors brought structure and consistency to the Board, I brought industry analytics, a five-to seven-year vision, and a deep understanding of what differentiated lululemon and made it special.

Returning to Vancouver

After the IPO in New York, we returned to Vancouver. The atmosphere at the company was incredibly positive – everyone had seen their face on the screens in Times Square, and now most of our staff owned a share in the company we’d grown. Across the board, this was a transformative accomplishment, and we commenced our first day as a publicly traded company.

Over time, there were small pieces of the business model that seemed to break down as we grew. I’d been taking extra measures to protect and preserve the culture of lululemon, including establishing an award called the “Holder of the Flame” to elevate those who stood for transformational leadership, and continuing to ensure Landmark Education was available to all employees. In the future, I believed a Board of Directors that would let this award fall away was the board that could make lululemon mediocre. I also knew the board team that would remove the “Holder of the Flame” award and Landmark Education from the culture would be the downfall of lululemon.

I felt that everyone had trusted me when I told them that Bob Meers and his team would take lululemon to the next level and had trusted me again through the IPO. I needed to find out where things were breaking down.

The good thing about Bob was that he seemed genuinely excited to work at lululemon. He was a strong leader who could command attention and draw people in. With our 30 to 40 percent growth each year, Bob’s big achievement was recognizing and solving our bottleneck in production capacity.

Unfortunately, solving our production bottleneck was not enough to bring Bob fully into our culture. As Deanne Schweitzer put it: “Doubts about the future of the company were definitely on a lot of our minds when we started to see how Bob Meers was leading the company, the people he was hiring, and the money he was spending. Bob was spending money in the wrong places and hiring the wrong people – bringing in people who were there for the short term, not the long term. There was a feeling that we were all looking at our watches and wondering, ‘How long am I going to last here?’”

Bree Stanlake made this observation: “When Chip was our CEO, it was a period of high growth, but it felt very free, very entrepreneurial in the truest sense of the word. There were some people that Bob brought on who didn’t really fit with the culture. It just started to feel like people were there to make money, then leave. It may sound trivial, but some things showed us that they just weren’t in line with our culture. For instance, they didn’t care about working out. Doing regular workouts wasn’t important to them. Being healthy and fit is something that’s central to lululemon.”

A key challenge to employee satisfaction presented itself. We started to hire MBAs and experienced management whose pay grade was 50–100 percent more than our existing employees. Because we had a new business model, MBAs and experience meant very little. Our existing younger employees were spending their time teaching their bosses about the business. The inequality of ability and compensation put un- due stress on the HR department.

Bob and I still had a good working relationship, so after I studied the growing problems for a while, I spoke to him about the way trust, communication, and culture had eroded over the past year-and-a-half. He was the CEO, and I wanted to empower him to fix the problems. I outlined that things simply couldn’t continue to carry on as they had. Bob assured me that now that he’d taken us public and the share price was skyrocketing, the differences could be reconciled.

The Fight in the Air

After a few more months had gone by, I was on a private flight with Bob Meers and David Mussafer from Advent. At one point, Bob and David started raising their voices and, after a moment, David asked Bob to take the heated conversation into the galley. The plane was so small that I could still hear what was being said, but I tried to be respectful. Bob and David had known one another before Bob came on board at lululemon, so I assumed their argument was personal given their shift to the galley – but it wasn’t.

After the flight, Bob told me he would soon leave lululemon. I was shocked. I thought Bob would be around for five years, leading us through our high-growth period. I didn’t understand why he was leaving so soon.

At any rate, with Bob’s departure hanging in the air, it turned out he already had a successor in mind. Bob wanted us to meet a woman named Christine Day, who was introduced to Bob (and lululemon) by Rhoda Pitcher.

At the end of 2006, Christine had left her position as head of the Asia-Pacific division at Starbucks to take a year off. She’d been with Starbucks’s international group for three-and-a-half years. She’d been with the coffee giant for 20 years as a trouble-shooter, rejigging the foundations for Asia. The time had come for her to spend more time with her family. By September 2007, as her year-long sabbatical drew to a close, she began to look at what her next move would be.

We contacted her in October and asked her to come and see us before she made any other decisions. The first time I met Christine face to face was at a restaurant in Seattle. Rhoda Pitcher, our board member and a Seattle native, joined us for the meal.

During our meeting, Christine told me that lululemon appealed to her on a lot of different levels. Primarily, she could see how unique the product and its business philosophy were. From Starbucks, she understood how the vertical retail model – selling lululemon product in lululemon stores – allowed for our higher margins. The Guest experience was essential, and Christine said she was impressed by the loyalty we’d generated with our customers.

I was excited to land a Starbucks executive because the company philosophies, locations, employee, and Guest profiles seemed so similar to those of lululemon. I thought she would be a good fit. My only concern was not having an athlete at the helm of lululemon.

Something I didn’t know at the time was that Bob was doing everything he could to accelerate his departure from lululemon. A long, drawn-out search for a suitable replacement would only slow that process down, so Bob was highly motivated to hire Christine for the job as COO. She was slated to join lululemon in January 2008.

Christine came in as a COO with the idea to take over the CEO position from Bob. She’d never held the top job before and would need a little time with us to get the lay of the land. Still, it was good that the best candidate to run a female-oriented company was a well-accomplished woman.

1. Steve Gelsi. “Lululemon Athletica IPO Jumps 50%,” MarketWatch, July 27, 2007,www.marketwatch.com/story/clothing-maker-lululemon-rallies-50-raises-328-mln.

2. Louise Story. “‘Seaweed’ Clothing Has None, Tests Show,” New York Times, November 14, 2007,www.nytimes.com/2007/11/14/business/14seaweed.html.

3. Story. “Seaweed,” (see chap. 21, n. 6).