Lululemon’s primary target consumer is a woman that is socially and physically conscious and one who acknowledges the benefits of leading a well-balanced healthy lifestyle. “She is increasingly tasked with the dual responsibilities of career and family and is constantly challenged to balance her work, life and health.” This target market is very dynamic and conscious of external environmental trends. Lululemon also focuses its products towards men and women who work, play, and share a common goal of living a healthy life. Lululemon “believes consumer purchase decisions are driven by both an actual need for functional products and a desire to create a particular lifestyle perception.”
As direct competitors Nike, Adidas, and Under Armour are strong worldwide-recognized brands that are able to generate higher sales because of the broader line of products and customer bases. For that reason, lululemon also competes against smaller yoga-inspired athletic clothing companies such as One Tooth Fashion, Tonic Lifestyle Apparel and Lotuswear.
Lululemon “doesn’t advertise on television, preferring to market itself with community-based campaigns, including free outdoor yoga sessions.” Lululemon uses free local newspapers, community events, store openings, and word of mouth to promote and advertise their brand. When lululemon opened the Vancouver store on Robson Street, “it ran a contest that gave away free outfits to the first 30 people who showed up naked.” This non-traditional marketing allows lululemon to stand out in an industry dominated by large, well-established corporations. Lululemon also created buzz for their company by taking advantage of the 2010 Winter Olympics, being held in Vancouver. Olympic knockoff apparel was popular with consumers, however, lululemon pushed the limits in producing Olympic inspired apparel, despite not being an official outfitter or holding an agreement with VANOC for rights to the trademark.
Lululemon’s price point reflects their high quality, whereas smaller retailers produce goods for less, leading to lower consumer pricing. The high price point may deter shoppers on a tight budget and push them to buy from smaller or imitation retailers with lower quality. Therefore, any impact on the textile athletic apparel industry would be in the form of competitors lowering selling prices or decreasing their product and manufacturing costs.
Accounting, Finance, Legal and Environmental Issues
This section highlights internal, external, and regulatory forces that might impact a decision on whether or not to invest in lululemon.
Primary Shareholders
Founder and former CEO, Chip Wilson, currently owns 34.4 percent. The directors and executive officers (12 persons) own 35.2. Diversified shares eliminate the chance of one major unit holder potentially controlling lululemon’s financial and operating activities.
The two largest external shareholders are Fidelity Investments and Capital World Investors, Inc, which own 14.9 and 9.9 percent respectively. These rivalry investment firms have over a trillion dollars in assets and represent multiple clients all over the globe. However, they do not hold large enough pieces of Lululemon to exercise control. When an investor owns 20 percent of a company’s shares they often begin to show signs of significant influence. As a potential investor there is minimal risk in regards to lululemon’s shareholder control.
Restated Statements & Policy Changes
In assessing lululemon’s annual reports from 2007 to 2010, the financial statements are comparable and consistent. New revenues and expenses due to change in business practices have been clearly stated. The reported numbers create minimal risk to an investor in determining a buy option.
Discontinued Operations
During the first quarter of 2008, lululemon ended three joint ventures with Descente Ltd. These results lead to the closure of four corporate stores located in Japan. The loss from the discounted operation was $1.2 million. Lululemon made a point to recognize this and made sure to fully accrue it in quarter two. As an investor this type of action is extremely positive and could be critical in the decision to invest.
Legal Issues
Intellectual Property
Lululemon does not own patents or exclusive intellectual property rights to their fabrics or manufacturing technology. Their suppliers and manufacturers own the intellectual property rights for lululemons’ fabrics, technologies, and manufacturing processes. Which are based in numerous regions including China, Canada and South East Asia. Lululemon does however own the trademarks of lululemon athletica & design, their logo design, and lululemon as a word mark, in Canada, the United States, and all other countries in which their products are sold or manufactured. Lululemon’s word mark and design are registered in over 66 jurisdictions, covering 114 countries in addition to their registrations in Canada and the United States. Lululemon owns the trademarks on many of the names of fabrics including Luon, LULLURE, Silverescent, and Vitasea.
Other Legal Issues
Lululemon has faced four class action lawsuits since 2007. On March 14, 2007, one of lululemon’s executive officers, James Jones, filled suit against the company claiming that they terminated his employment contract without cause and lawful compensation resulting in breach of contract and wrongful dismissal. May 8, 2008, an employee named Brian Bacon filed a similar suit. Bacon claimed that lululemon terminated his employment contract without cause and without reasonable notice resulting in breach of contract, losses and damages. Lululemon found both claims to be without merit and strongly defended against them.
On March 26, 2009, an employee named Brett Kohlenberg filed a class action lawsuit alleging that lululemon violated numerous sections of the California Labor Code by failing to pay their employees for certain rest and meal breaks and failure to provide itemized wage statements. April 2, 2009, three employees filed a class action lawsuit alleging that lululemon violated numerous sections of the California Labor Code by requiring employees to wear lululemon clothing during working hours without any compensation for the cost of this clothing and by giving bonuses in the form of gift cards, only redeemable at lululemon. In both cases, lululemon agreed to general terms of settlement.
Environmental Issues
Three external forces have been identified that impact the way lululemon operates. These highlighted external factors include social trends, economic conditions, and charitable opportunities.
Lululemon’s focus is on yoga inspired athletic apparel. Today yoga is no longer a fitness fad, but has become a lifestyle trend. Unfortunately, trying to appeal to the social growth of an active and healthy lifestyle has created a trend in the textile industry of making unsubstantial claims about sustainable fibers in clothing such as seaweed, bamboo and soybeans. In 2007, lululemon released their vitasea line, which was infused with seaweed fiber and claimed to have therapeutic benefits. The Competition Bureau along with a test administered by the New York Times, were unable to prove lululemons’ claims. The Textiles Labelling Act states that “it is illegal to make false or misleading claims related to a garment, including in regards to its fiber content.” Therefore, the Competition Bureau had lululemon remove all claims and labels indicating that the Vitasea line had health benefits. Lululemon also promotes functional everyday clothing as many women sport lululemon’s stylish “groove pants” or hooded sweaters as casual wear. This gives lululemon a competitive edge in the athletic apparel industry.
Economic conditions also impact the way lululemon operates, as they can adversely affect consumer spending. Lululemon is considered a specialty retailer and because of this, their operations depend significantly on economic conditions. The current instability in the United States economy has resulted in an overall decrease in the growth of the retail sector because of decreased consumer spending. This has negatively affected lululemon’s sales.
The recent economic downturn has also had some positive effects on lululemon. Instead of price reductions, lululemon expanded their product line and invested in improving the quality and varieties of their athletic wear. In doing so they were able to attract customers into the store with new and improved products, namely their new running outfits. Before the recession, lululemon was facing a mass expansion strategy and growth into the United States. This forced lululemon to slow down and re-evaluate their expansion strategy. In 2008, lululemon opened 35 stores in the United States of which proved to be the least successful in lululemon’s history. By re-assessing their expansion strategy and conducting more in-depth research, lululemon was able to determine their most profitable locations. Understanding the profit centres contributed to higher than expected fourth quarter results in the following year.
Lululemon is committed to building strong community relationships. This is possible through their Charitable Giving program. This program allows customers to submit which charities they would like the lululemon to support, after which the company selects eight recipients. As a corporate social responsibility leader, lululemon also supports the Centre for Integrated Healing, an organization dedicated to the holistic treatment and prevention of cancer. In addition, they support the Silken Laumann’s community-oriented Active Kids Movement, a national charity established to increase the physical activity levels of Canadian children and prevent childhood obesity.
Horizontal and Vertical Analysis
Lululemon has seen significant, consistent growth from 2006 to 2010. Revenues were moderate in 2006 and 2007 before the IPO in 2007. After the IPO Lululemon posted 25 percent growth between 2007 and 2008, 78 percent growth between 2008 and 2009, and levelling off to 68 percent between 2009 and 2010. In terms of profit margin, Lululemon started in 2007 being three percent behind its least profitable competitor, posting a five percent profit margin. In 2008, Lululemon had the second highest profit margin, next to Adidas, with an 11 percent profit margin. In 2009, Lululemon surpassed the industry average and became the leader in profitability showing and 11 percent profit margin while its nearest competitor; Adidas posted a 10 percent profit margin. The following graphs represent this data.
Profitability Ratios
The Lululemon profitability ratios are consistent with its continual growth. As previously stated, the Lululemon profitability margin is considerably higher than the industry average and its nearest competitor. Its return on equity (ROE) also showed significant growth from 2007 to 2010. Lululemon remained 20 percent above the industry average and 40 percent higher than its nearest competitor. Earnings per share remained consistent with its growth in all other areas. Its EPS grew from $0.68 in 2008 up to $1.15 in 2010. It appears from the ratios and the analysis that lululemon has been able to remain sustainably profitable throughout the economic recession and remain ahead of its competition. Lululemon may be a smaller company, however it is far more profitable and much more efficient than its competition according to its profitability ratios.
Liquidity
The liquidity of lululemon continues to be above an industry average that includes Nike, Adidas, and Under Armour. Although lululemon is new to this defined industry, which includes well-established organizations that have been able to diversify into equipment manufacturing, they are performing on par with industry leader Nike. Nike, Adidas, and Under Armour do not showcase the boutique like status that lululemon does. Currently lululemon is not a wholesaler and deals with direct customer transactions. The average collection period of lululemon is low due to the direct link between the end customer and the organization where receivables can be mostly attributed to major credit card companies. They are not supplying external organizations therefore there are less large credit sales. There is a decline in receivable turnover in 2010, which could be attributed to the recent opening of franchise operations in locations around the world.
Solvency
Lululemon continues to perform well below the defined industry average. Being a new company to this industry they have been able to manage their debt load effectively even with an industry wide increase in debt. From 2008 onwards, lululemon has consistently declined. Under Armour and Nike are above average by 10 and 20 percent respectively, whereas Adidas is well below the average. This may be a result of Adidas being the oldest of the companies and well established. Minimal financing by lululemon has kept the interest expense relatively low in comparison; they rely heavily on funds raised in public trading to grow their company. Through consistently managing their debt, lululemon continues to remain well solvent.
After lululemon’s IPO in July of 2007, their price to book ratios showed that they are highly valued and traded at a premium. There was a sharp decline from 2008 to 2009. At this time, lululemon began to appear as high risk with looming lawsuits and risky advertising practices. With those issues behind them there is a steady rise in perceived value of lululemon as they enter the arena with large established companies.
Investment Recommendation
The criteria used to make our recommendations were based on the “Warren Buffet Way.”
Business Tenets
With consistent growth since the IPO and well-planned and calculated expansion through the current recession the long term prospects of lululemon appear quite favourable. The main demographic lululemon focuses on are people who are active and lead healthy lifestyles. This segment continues to grow and lululemon has already created a niche market.
Management Tenets
Since the founding of the company lululemons’ corporate values have been consistently displayed, management has remained transparent to their shareholders, and expansion has only been through retail ventures to avoid mass wholesaling.
Financial Tenets
With a profit margin three percent above the industry average and well-managed debt load to minimize interest paid this an efficiently run organization. Canadian sales attribute for 60 percent of revenues and they are now 17th in brand value in Canada according to Interbrands Best Canadian Brands 2010. Lululemon may become overvalued in the long term as they continue to grow, so early investment would have the greatest return.
Recommendation
Buy it.
Our recommendation regarding lululemon is that it’s a sound investment both long and short term.
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Appendix
Figure 1: Lululemon Sales by Segment – Fiscal Year 2010
Source: “Lululemon Athletica, Inc. – Annual Report,” page 81, filed March 25, 2010, .
Figure 2: Lululemon Sales by Country – Fiscal Year 2010
Source: “Lululemon Athletica, Inc. – Annual Report,” page 82, filed March 25, 2010, .
Appendix A-J
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