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LULU AT A GLANCE

P/E ► 37.6 AVG EV/EBITDA ► 20.1 AVG ROA ► 18.3% HIGH ROE ► 24.5% AVG Debt to Equity ► 0.281 LOW Current Ratio ► 4.21 VERY HIGH Interest Coverage Ratio ► 10K VERY HIGH

 

 

 

 

 

 

Lululemon Athletica (NYSE: LULU) is a retailer that sells yoga gear for women but is branching out into other kinds of active wear. The company operates 113 stores mostly in the US and Canada and sells products in specialty fitness centers through its wholesale segment.^{[1] [2]} Lululemon's high product prices result in high margins for the company (16.0% operating margin in 2008^[3]). The company's net revenue has increased from $40.7 million in fiscal 2004 to $353.5 million in fiscal 2008, representing a 71.6% compound annual growth rate. ^[1] Its Q3 2009 revenue was reported as $112.9 million, an increase of 30% from the $87.0 million it made in Q3 revenue the year before, while its net income rose to $14.1 million from $8.8 million the year before. The company attributed its success to building sales momentum and a continuing strong relationship with its suppliers.^[4] The company is currently forecasting a continuation of this growth, expecting fourth quarter revenue of $140-145 million.^[5]

Lululemon's customers are typically high-income women who are relatively insulated to prices and downturns in the economy. This was evident in 2008 as Lululemon's sales continued to grow despite a sluggish economy in the U.S.. Net revenue increased from $269.9 million in 2007 to $353.5 million in fiscal 2008, a 30.5% increase. ^[1] Same store sales grew 0% in 2008, indicated that most of the company's revenue growth resulted from the opening of new new stores. ^[1] In addition to new store locations, the company is preparing to launch an e-commerce operation on their website in 2009 while expanding its product lines to include more men's apparel as well as different accessories such as underwear, sandals and bags.^[6]

Business Overvew

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Business and Financial Metrics

Net revenue increased from $269.9 million in 2007 to $353.5 million in fiscal 2008, a 30.5% increase. ^[1] In December 2009, Lululemon reported Q3 2009 revenues of $112.9 million, a 30% increase from Q3 2008 revenue.^[4] However, comparable Same Store Sales growth was 0% in 2008, compared to 34% Same store sales growth of 34% in 2007. ^[1]

History

Lululemon was founded in 1998 in Vancouver, Canada by Chip Wilson when he recognized a growing number of women participating in sports and other fitness activities. The company's first store shared space with a yoga studio and has since continued to focus on yoga gear, providing customers with technical apparel designed to perform during activities such as yoga, dance, exercise and other sports. Since then, Lululemon's product line has expanded to include men's clothing as well.

Business Segments

• Corporate owned stores (89.3% of net revenue^[9]): As of February 2009, the company had 103 corporate-owned stores in Canada and the US, discontinuing its operations in Japan in the second quarter of 2008.^[9] The company plans to increase North American net revenue by opening additional corporate-owned stores. ^[9]
• Franchises (4.6% of net revenue^[10]): As Lululemon was emerging into the clothing industry, it entered into franchise agreements to more quickly expand its brand name and increase net revenue. In exchange for the use of Lululemon's brand name and right to operate stores in certain regions, franchises pay the company a one-time franchise fee and ongoing royalties based on their gross revenue. ^[9] According to Lululemon's SEC filings, opening new franchise stores is "not a significant part of our near-term growth strategy."As of February 2009, the company had 5 franchise stores in North America and 5 franchise stores in Australia. ^[9]
• Other (6.1% of net revenue^[9]): Other net revenue includes wholesale sales, telephone sales, and sales through a limited number of company-owned showrooms. Wholesale customers include premium yoga studios, health clubs, and fitness centers. ^[9]

Vertical Retail Strategy

Lululemon apparel is sold in the company's own-branded stores (both Lululemon and two special OQOQO stores that focus on organic apparel) as well as in high-end lifestyle centers and yoga studios.^[11] As of February 2009, Lululemon apparel was sold principally through its own 113 retail stores located mainly throughout Canada and the US. ^[1]

Most of Lululemon's stores are located in urban shopping districts, malls and lifestyle centers, and they cater to high-income, trendy active adults willing to pay high prices for Lululemon's apparel. Lululemon's track record of growth over the past five years, from $18 million in sales in 2003 to $274 million in 2007, has been dependent on store expansion.^[12] The company opened 27 stores in North America during FY07, increasing its store base by 50% as sales grew 77.0%.^[13] The company has opened 7 new stores through the first four months of 2008 and plans on opening approximately 35 stores per year for the next several years.^[14][15] Even while rapidly expanding their store base, Lululemon's high prices have allowed the retailer to maintain a gross margin annually above 50% since 2003, topping at 53.3% in 2007.^[16] The company also has one of the highest sales per square foot figures in retail , averaging $1,700 of sales per square foot in its corporate-owned stores in FY07 (compared to $489 at Abercrombie & Fitch Company (ANF) ^[17]and $398 at Gap (GPS)^[18]).^[19]

Lululemon is unique in that it does not rely on television or print advertising to promote its product, but rather relies on building strong community relationships (e.g. building strong relationships with yoga studios and gyms in the communities in which it operates). With such a personal approach to its business, LULU keeps its customers happy, and has seen sales jump 14% to $97.7 million as of October 2009, proving its ability to stay afloat amidst an economic recession.^[20]

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Trends and Forces

High-end Retailers Less Affected by Economic Downturns

High-end retailers such as Lululemon appeal to customers in the upper-income bracket whose absolute spending power is less affected by macroeconomic downturns. Lululemon's high prices, around $50-60 for a t-shirt, cater to the upper-class consumer willing to pay premium prices for workout gear. While the wallets of the lower- and middle-classes are pinched during economic downturns, Lululemon's core customers typically have wealth that allows them to continue purchasing trendy and pricey exercise apparel despite downward trends in the economy . As such, as the U.S. economy has struggled in the second half of 2007 and early in 2008, Lululemon's U.S. sales more than tripled in 2007 from $17 million to $53 million^[22] while the company's same store sales grew 28% in the first quarter of 2008^[23]. Apparel retailers who cater to middle-class consumers, such as The Gap and Old Navy which posted 7% and 18% decreases in same store sales respectively in the first quarter of 2008^[24], have been struggling to sell merchandise to customers being hit hard by rising oil prices and the downturn in the U.S. economy. The weakening consumer environment appears to be catching up with LULU however- although the company's sales for Q3 2008 increased by 34%^[25], the company greatly lowered its Q4 2008 outlook because of lower consumer spending as well as a weakening Canadian Dollar (CAD).^[26] In Q4 2008, the company expects that its comparable store sales will decrease in the low double digits, which caused LULU to lower its revenue expectations to $90-$95 million during the quarter, down from $130 million.^[26]

Rapid Store Expansion Fueling Sales Growth

Lululemon's huge sales growth, from $18 million in 2003 to $274 million in 2007^[27] which translates to a 72% CAGR, can be largely attributed to the company's store expansion. This is evident when observing the large disparity between Lululemon's net sales growth and comparable store sales growth. In 2005, sales at stores open for one year or more (the definition of comparable store sales) grew only 19% while net sales grew 106.5%, with the difference made up by sales at new stores.^[28] Operating 81 stores at the end of fiscal 2007^[29] the company still has room to open new stores in North America and its trend of annual sales growth of over 75% could be sustained as Lululemon is planning on opening approximately 35 stores annually over the next several years^[30].

Small Stores, High Prices Lead to Wide Profit Margins

A combination of small stores and high prices help to create large profit margins for Lululemon by increasing the difference between the company's operating costs (store operating expenses are lower for smaller stores: rent, utilities, number of employees needed to cover the selling floor, etc.) and overall revenue. The average Lululemon corporate-owned store size is only 2,900 square feet,^[31] compared to average store sizes of 7,089 square feet^[32] and 12,504 square feet^[33] at Abercrombie & Fitch Company (ANF) and Gap (GPS), respectively. With a significantly smaller store and its high priced items (over $60 for t-shirts), Lululemon is able to achieve sales per square foot of $1,700 in its corporate-owned stores, over three times as much as sales per square foot at Abercrombie & Fitch Company (ANF) ($489)^[34]and Gap (GPS) ($398).^[35] All of this translates into lower costs and higher revenue for Lululemon which largely drive the company's 53.3% gross margin and 18.2% operating margin.^[36]

E-Commerce Launch in 2009: Reaching Customers Outside Major Urban Markets

Lululemon's stores in North America are mostly located in major cities, such as Los Angeles, Seattle, New York, Toronto and Vancouver. At the end of Q1 FY08 the company only operated 37 stores in the U.S., with over 15 of them located in California^[37]. Due to the company's limited physical locations and Lululemon's refusal to sell its products through third-party online channels, the number of potential customers the brand can reach is limited. In order to reach a more customers, Lululemon will launch an e-commerce operation on their website in 2009^[38]. E-commerce is an increasingly significant source of growth for apparel retailers as technology usage has become a major part of everyday life. For example, direct-to-consumer sales grew 49% in fiscal 2007 to $259 million (7% of sales) for Abercrombie Fitch^[39]. Lululemon's online store will open in the second half of 2009.

Competition

Lululemon is one of the only major retail chains and clothing manufacturers dedicated to yoga and fitness apparel, giving it a powerful position as a niche player in the apparel retail market. It's primary competitors are small businesses that operate individual yoga-wear shops and retail shops located in gyms and fitness centers, as well as sporting goods retailers such as Dick's Sporting Goods (DKS) which sell fitness apparel. It is nearly impossible to compare Lululemon to these competitors as the smaller stores are too small and sporting goods giants like Dick's Sporting Goods (DKS) derive most of their business from product categories, such as sporting equipment and footwear, that Lululemon does not carry. However, Lululemon's advantage over these smaller operations is the popularity of the Lululemon brand among yoga-enthusiasts that has risen with the company's tremendous growth over the past five years.

Note: All figures for fiscal 2007.^[40][41]

On a larger scale, Lululemon competes with sports industry giants Nike and adidas which produce athletic apparel and accessories. Each of these companies is incredibly larger than Lululemon in terms of sales (2007 sales: Nike $16.3 billion^[42], adidas $13 billion^[43]) and channel presence as they have their own stores in addition to being carried in a multitude of online and brick-and-mortar stores. Sports apparel and footwear manufacturer Under Armour is also a competitor of Lululemon as the company produces high-tech apparel for exercise and athletics. Under Armour (UA) is closer in size to Lululemon, with $606 million of sales in 2007, although Under Armour targets young team sport athletes while Lululemon focuses on customers involved in yoga, running and other individual exercises.^[44]However, Nike, adidas and Under Armour all have significant footwear operations, which is not part of Lululemon's business.

Note: All figures for fiscal 2007.^[45][46]

References

1. ↑ ^{1.0 1.1 1.2 1.3 1.4 1.5 1.6} LULU 2008 10-K, Item 1 "Business," page 1
2. ↑ Lululemon Athletica (LULU) Press Release, First Quarter Fiscal 2008 Results
3. ↑ Google Finance
4. ↑ ^{4.0 4.1} lululemon athletica inc. Announces Third Quarter Fiscal 2009 Results
5. ↑ ululemon athletica Sees Revenue Above Estimates
6. ↑ Lululemon Athletica (LULU) Press Release, First Quarter Fiscal 2008 Results
7. ↑ Lululemon Athletica (LULU) 10-K 2007, Segmented Financial Information, pg. 86
8. ↑ Lululemon Athletica (LULU) 10-K 2007, Net Revenue, pg. 37
9. ↑ ^{9.0 9.1 9.2 9.3 9.4 9.5 9.6} LULU 2008 10-K, Item 7 "Management's Discussion," page 30
10. ↑ LULU 2008 10-K, Item 7 "Management's Discussion," page 29
11. ↑ Lululemon Athletica (LULU) 10-K 2007, Overview, pg. 29
12. ↑ Lululemon Athletica (LULU) 10-K 2007, Selected Consolidated Financial Data, pg. 27
13. ↑ Lululemon Athletica (LULU) 10-K 2007, Selected Consolidated Financial Data, pg. 27
14. ↑ Lululemon Athletica (LULU) Press Release, First Quarter Fiscal 2008 Results
15. ↑ Lululemon Athletica (LULU) 10-K 2007
16. ↑ Lululemon Athletica (LULU) 10-K 2007, Selected Consolidated Financial Data, pg. 27
17. ↑ Abercrombie & Fitch (ANF) 10-K 2007, Financial Summary, pg. 11
18. ↑ Gap Inc. (GPS) 10-K 2007, Selected Financial Data, pg. 15
19. ↑ Lululemon Athletica (LULU) 10-K 2007, Overview, pg. 1
20. ↑ Lululemon's a Real Lulu: Under the Radar
21. ↑ Lululemon Athletica (LULU) 10-K 2007, Selected Consolidated Financial Data, pg. 27
22. ↑ Lululemon Athletica (LULU) 10-K 2007, Selected Consolidated Financial Data, pg. 27
23. ↑ Lululemon Athletica (LULU) Press Release, First Quarter Fiscal 2008 Results
24. ↑ Gap Inc. (GPS) Press Release, First Quarter Earnings Release
25. ↑ "lululemon athletica inc. Announces Third Quarter Fiscal 2008 Results" MarketWatch.com 12/11/2008
26. ↑ ^{26.0 26.1} "Lululemon Athletica inc. Revises Q4 2008 Outlook To A Range Below Analysts' Estimates; Lowers FY 2008 Outlook" Reuters.com 12/11/2008
27. ↑ Lululemon Athletica (LULU) 10-K 2007, Selected Consolidated Financial Data, pg. 27
28. ↑ Lululemon Athletica (LULU) 10-K 2007, Management's Discussion and Analysis of Financial Condition and Results of Operations, pg. 29
29. ↑ Lululemon Athletica (LULU) 10-K 2007, Selected Consolidated Financial Data, pg. 27
30. ↑ Lululemon Athletica (LULU) Press Release, First Quarter Fiscal 2008 Results
31. ↑ Lululemon Athletica (LULU) 10-K 2007, Store Economics, pg. 5
32. ↑ Abercrombie & Fitch (ANF) 10-K 2007, Store and Gross Square Feet, pg. 19
33. ↑ Gap Inc. (GPS) 10-K 2007, Store Count and Square Footage pg. 20
34. ↑ Abercrombie & Fitch (ANF) 10-K 2007, Financial Summary, pg. 11
35. ↑ Gap Inc. (GPS) 10-K 2007, Selected Financial Data, pg. 15
36. ↑ Lululemon Athletica (LULU) 10-K 2007, Selected Consolidated Financial Data, pg. 27
37. ↑ Lululemon Athletica (LULU) Press Release, First Quarter Fiscal 2008 Results
38. ↑ Seeking Alpha, LULU Q1 FY08 Earnings Cal Transcript
39. ↑ Abercrombie & Fitch (ANF) Press Release, Fourth Quarter and Fiscal Year 2007 Results
40. ↑ Lululemon Athletica (LULU) 10-K 2007, Selected Consolidated Financial Data, pg. 27
41. ↑ Dick's Sporting Goods (DKS) 10-K 2007, Five-Year Financial Summary, pg. 26
42. ↑ Nike (NKE) Annual Report 2007
43. ↑ adidas A.G. Financial Highlights
44. ↑ Under Armour (UA) Financial History
45. ↑ Lululemon Athletica (LULU) 10-K 2007, Selected Consolidated Financial Data, pg. 27
46. ↑ Under Armour (UA) 10-K 2007, Selected Financial Data, pg. 26