Lululemon Shares Rally After Hours as CEO Plans Exit. Does the Market Expect a Strategy Shift?

Lululemon Athletica (NASDAQ: LULU) closed out a tumultuous year on Thursday, announcing in its third-quarter earnings report that Calvin McDonald would be departing as CEO on Jan. 31, 2026.

The company also showed off better-than-expected results in the Q3 report, though profits fell, and its guidance for the key holiday quarter missed the mark. At least part of the stock's 11% surge after hours seemed to be a response to the change in the CEO chair.

CFO Meghan Frank and Chief Commercial Officer Andre Maestrini will serve as interim co-CEOs while the company searches for its next CEO.

McDonald took over as CEO in 2018 and had delivered strong results for shareholders up until the last two years when a combination of product missteps and weak consumer spending in the U.S. pummeled the stock, which was down 51% year-to-date before the earnings report.

Lululemon's third-quarter earnings report typified the company's recent challenges. Comparable sales fell 5% in the Americas, though store growth and strong performance in international markets like China lifted overall revenue by 7% to $2.6 billion. Profitability also declined as a result of domestic weakness, with operating margin down 350 basis points to 17% and earnings per share slipping from $2.87 to $2.59.

Image source: Lululemon.

Can a new CEO get Lululemon back in shape?

Based on the stock pop, investors seem to be hopeful that a new CEO can breathe new life into the company, though it's hard to assess what changes might take place before a new CEO is even named. Still, investors seem to be pleased that the company is taking action to stem the sliding profits, and that's enough for now.

However, a new CEO will have to confront the same macro headwinds that have plagued peers like Nike and Deckers in the North American market, as it's been a tough year for the apparel and footwear sector.

On the second-quarter earnings call, McDonald presented a turnaround plan designed to refresh the company's product lineup in areas where it's fallen flat, and speed up its inventory cycle so it can respond faster to customer demand. McDonald had expected those changes to begin to show results by next spring, and he stood by that, saying in the transition announcement, "I believe the outstanding product pipeline we've built, and the action plan we've put into place, will yield positive results, and deliver value to shareholders in the months and years ahead."

Is Lululemon a buy?

New CEO or not, it's unclear when Lululemon will get back on track, and the decision to remove McDonald seems to indicate a lack of faith in his strategy, so a turnaround may take even longer than he had promised.

The good news is that Lululemon stock remains cheap, trading at a price-to-earnings ratio of 16 based on the updated guidance for the year. Over the long term, the brand should be strong enough to drive a recovery no matter what happens with the next CEO or the macro environment.

The Motley Fool has positions in and recommends Deckers Outdoor, Lululemon Athletica Inc., and Nike. The Motley Fool has a disclosure policy.