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Lululemon (LULU)Stock (Apparel - Clothing Industry, Apparel Stores Industry, Fashion Industry Industry, Retail Industry)
 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 78 stores mostly in the United States and sells products in specialty fitness centers through its wholesale segment.[1] Lululemon's business earns a high margin (a 53.3% gross margin and 18.2% operating margin in 2007) due to high prices on its products. Its overall sales increased 84.5% in 2007, to $274.7 million from $148.8 million the year prior.[2] Lululemon's customers are typically high-income women who are not sensitive to prices and downturns in the economy. This was evident in the first half of 2008 as Lululemon's sales continued to grow despite a sluggish economy in the U.S., as revenues increased 59% and net income more than doubled from $8.6 million to $19.6 million in the first two quarters of 2008.[3] During the same time period comparable store sales grew just 14%[3], demonstrating that much of Lululemon's sales are coming from newly opened stores as the company expands throughout Canada and the United States. 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.[4]
[edit] Business OvervewLululemon 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. 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.[7] Although the company began as an apparel retailer for women and the majority of its sales are from women's apparel, Lululemon's product line also includes men's clothing as well. 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.[8] The company opened 27 stores in North America during FY07, increasing its store base by 50% as sales grew 77.0%.[9] 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.[10][11] 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.[12] 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) [13]and $398 at Gap (GPS)[14]).[15]
[edit] Trends and Forces[edit] High-end Retailers Less Affected by Economic DownturnsHigh-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[17] while the company's same store sales grew 28% in the first quarter of 2008[18]. 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[19], have been struggling to sell merchandise to customers being hit hard by rising oil prices and the downturn in the U.S. economy. [edit] Rapid Store Expansion Fueling Sales GrowthLululemon's huge sales growth, from $18 million in 2003 to $274 million in 2007[20] 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.[21] Operating 81 stores at the end of fiscal 2007[22] 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[23]. [edit] Small Stores, High Prices Lead to Wide Profit MarginsA 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,[24] compared to average store sizes of 7,089 square feet[25] and 12,504 square feet[26] 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)[27]and Gap (GPS) ($398).[28] 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.[29] [edit] E-Commerce Launch in 2009: Reaching Customers Outside Major Urban MarketsLululemon'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[30]. 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[31]. 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[32]. Lululemon's online store will open in the second half of 2009. [edit] CompetitionLululemon 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.[33][34] 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[35], adidas $13 billion[36]) 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.[37]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.[38][39] [edit] References
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