Lululemon’s First Private Equity Process in “Little Black Stretchy Pants”
In 2018, the founder of Lululemon, Chip Wilson, initially published Little Black Stretchy Pants about his personal entrepreneurial journey and the origins of the company. Wilson’s separation from Lululemon’s operations in the mid-2010s made headlines, but this book chronicles a much longer and personal journey. From building up personal savings by working on an Alaskan pipeline to zipper supply chain issues risking millions in his first company, Wilson doesn’t mince words in acknowledging the obstacles and bets that ultimately contributed to Lululemon.
This highlight, from chapters 19 and 20, is focused on Wilson’s first big deal, initiating the process to take on a private equity investment for growth. In the mid-2000s, Lululemon had built up Canadian operations alongside a cult-like reputation among yogis, but had its sights set on global expansion. Wilson and his wife were also about to welcome twins, creating a household with three boys under age 2. Amidst these personal and professional milestones, Wilson began evaluating investor options:
What were my next steps? Would I partner with a larger retailer? Did Lululemon need a more experienced CEO? How could I ensure my family was taken care of for life? I had turned down the offer from Victoria's Secret, but I still had a big stack of letters of interest from big public companies and private equity firms…
I had been working hard and the speed of growth was phenomenal. Every step was exhilarating. But I had not taken the time to develop the relationships I would need in the future. I thought I could get advice I needed with private equity...
But Wilson had reservations about how to navigate the process, and acknowledges he may have underappreciated how incentives influenced later events for the company and his involvement:
I knew the business of my business, but I was frightfully naive about the business that invested in businesses and the motivation of people who run them…
My general manager Darryl and CFO Brian had determined that the company was worth about $225 million, about 10 times the number I had come up with. From my end, I knew we had a great brand… In retrospect, I could have borrowed $40 million unencumbered from the bank to give my family a lifetime of security.
I had told the top tier of our senior employees that I would give them 10% of the company if we ever went public. This incentive probably drove the wrong actions, but I didn't understand it at the time.
I would soon have three boys under the age of 2 and my priority was to be present as a father... I was not astute enough to talk to advisors. This may seem counterintuitive, but in retrospect, I needed to talk to people who had been through the experience of PE before. I limited my options to either continuing as a CEO and prioritizing the business, or to selling part of Lululemon.
Selling would allow me to bring in advice, partners, and financial oversight, and give me the opportunity to prioritize my family. I chose family and I will never regret this choice...
The hard work had been done, and we simply needed to replicate what we had built. The company's profitability and cash flow were best in class.
I felt out of my depth... Corporate finance and tax were weak points for me, and I'd never been a natural negotiator… I was best in the world at making a product and asking a fair price for it... I didn't know what I didn't know, and I wasn't even sure where to go and ask for help...
I decided to work with a local Vancouver business broker who came highly recommended...
After an initial process he described as a “beauty pageant,” Wilson narrowed down what he was after, and how dollars and growth resources intertwined:
The Liz Claiborne people offered $500 million at $100 million per year to be paid out over 5 years. They also asked that Lululemon perform within their overall corporate structure, meaning that we would have to conform to their systems... I thought the culture clash would be too big an obstacle to overcome…
There was a lot more appeal in a deal that got us less money, but the right partner…
The things I wanted from a private equity agreement were five-fold:
Expertise in US real estate locations
Help in hiring world class upper management
To maintain a 70% interest in the company
Advice on future needs and processes so Lululemon could skip the usual growth roadblocks
To have $40 million to fulfill the goals my wife and I had set out in 2002…
We ended up with offers from all 8 private equity groups that came to Vancouver. Their proposals ranged from $225 million to $270 million, but in the end it came down to a personality match…
It’s impossible to know how precise the priorities above were at that point in time. From a buyer’s perspective, this kind of list is incredibly helpful in determining if or how we may fit what a company’s priorities are and how they envision their future.
The most memorable nugget of Wilson’s account was about how he made sure Lululemon’s cultural values influenced the courting process, and not the other way around:
By the summer of 2005, I was determined to find the right personality fit in a potential private equity partner. Generally, interested private equity parties made a trip to Vancouver to have a look at our operations and meet our team. When they arrived, if things were going well, I’d take them up the Grouse Grind. Grouse is a local Vancouver ski mountain with a very popular rugged hiking trail, called the Grind, running up its side. If you’re in reasonable shape, it’s about an hour climb, straight up.
The Grouse Grind was a great way to measure cultural fit. People were showing up at our office in suits and ties and dress shoes… On the West Coast, the suit and tie subconsciously says you are not in control of your own life…
When I suggested a hike, some of these visitors acted as if it was a root canal. Not a great sign. But there were others that jumped on the opportunity to do the Grouse Grind. Doing a strenuous hike with someone was the first part of seeing if they might be the kind of person I would want to work with. We had to be authentic…
1.55 miles up 2,830 stairs on “Mother Nature’s Stairmaster.” Oh to have been on some of those hikes… [As a side note, we at Permanent Equity are happy to go on hikes or the like, but we’re also up for just sharing great food.]
Further into the chapter, Wilson walks through some of the final deal points that frustrated him, especially in retrospect. As an example, very close to the closing date, the investors tried to retrade the valuation on Wilson, individually, without warning. Based on the narrative, Wilson’s courters represented a narrow and consistent form of private equity (short hold period), but it’s not clear why he continued forward after that development, other than it was close to the birth of his children and the process had dragged on, leading to a desire to just get something done. Ultimately, a deal was closed at $200 million, prompting the next phase of Lululemon’s story, which led to its initial public offering a couple of years later.
The whole book, but especially these two chapters, spotlight the joys and struggles of building a company and team, and also outline in sometimes painful detail how operational success does not equate to expertise in finance, dealmaking, or corporate governance. Wilson is unabashedly a premium product, great-not-good, innovation-driven entrepreneur. Likely since Wilson’s story ultimately led to a public resignation from Lululemon, much of his analysis points out things he wishes he would have better appreciated at past key operational decision points.
It’s a gritty operator-oriented read (or Audible listen, as Wilson personally recorded an updated version in 2020), especially if your household has spent $128 on a pair (or ten) of the “little black stretchy pants.”
By Emily Holdman
Book Referenced: “Little Black Stretchy Pants” by Chip Wilson
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