Seema Samawi, Stephanie Wang, Toshe Ayo-Ariyo, Christine Yee, Kelsey Phinney

Smith-Tuck Business Bridge 2015

Lululemon is fairly valued; we value it at $66 per share, the current market price is $66

Strong Brand

2

Strong Brand Image

Potential for Expansion

Key Risks

Valuation

• High-status reputation drives consumer demand• Unique and community-based promotions create

company leverage

• Geographic growth through domestic and global locations and sales

• Market growth through menswear, ivivva, and e-commerce

• Competitors infringing on business strategies and target market

• Instability of executive management

• Assumptions and discounted cash flow analysis• Sensitivity and risk analysis rely on loss of brand image

Lululemon pioneers the female athletic wear market

Strong Brand

3

Key Risks

Valuation

Strong Brand Image

Potential for Expansion

Strong Brand Image – Potential for Expansion – Key Risks – Valuation

• High-status reputation drives consumer demand• Unique and community-based promotions create

company leverage

• Geographic growth through domestic and global locations and sales

• Market growth through menswear, ivivva, and e-commerce

• Competitors infringing on business strategies and target market

• Instability of executive management

• Assumptions and discounted cash flow analysis• Sensitivity and risk analysis rely on loss of brand image

Lululemon sells yoga-inspired apparel and accessories for women, men, and girls

4Strong Brand Image – Potential for Expansion – Key Risks – Valuation

Lululemon doesn’t just sell products – they sell a lifestyle

Brand ambassadors

5

Grassroots initiatives

Social Media

Strong Brand Image – Potential for Expansion – Key Risks – Valuation

Grassroots initiatives such as complimentary yoga classes

6Strong Brand Image – Potential for Expansion – Key Risks – Valuation

Facebook adds potential of $191.4 billion to revenue alone

• Facebook, Twitter and Instagram

7

• 1.1 million Facebook likes

• Average value of a like is $174

• 1.1 mil. * $174 = $191.4 billion

Strong Brand Image – Potential for Expansion – Key Risks – Valuation

Lululemon has leveraged their reputation to widen their customer base

8

Potential for Expansion

Key Risks

Valuation

Strong Brand Image

Strong Brand Image – Potential for Expansion – Key Risks – Valuation

• High-status reputation drives consumer demand• Unique and community-based promotions create

company leverage

• Geographic growth through domestic and global locations and sales

• Market growth through menswear, ivivva, and e-commerce

• Competitors infringing on business strategies and target market

• Instability of executive management

• Assumptions and discounted cash flow analysis• Sensitivity and risk analysis rely on loss of brand image

Lululemon opened 153 new stores in the past 5 years in North America

9

2010 2011 2012 2013 20140

50

100

150

200

250

300

Fiscal Year

Num

ber

of S

tore

s

Strong Brand Image – Potential for Expansion – Key Risks – Valuation

Expanded in fiscal 2014 in North America and International

Lululemon Athletica February 2, 2014 June 10, 2015

United States 171 275

Canada 46 54

Australia 25 29

New Zealand 4 6

United Kingdom - 7

Germany - 5

Hong Kong - 4

Singapore - 2

China - 2

Sweden - 1

Korea - 1

Netherlands - 1

Total 246 38710

Strong Brand Image – Potential for Expansion – Key Risks – Valuation

Lululemon is expanding its to the Middle East

11

Global Expansion Strategy• First Middle East store to be in Dubai Fall 2015• Targeting wealthy, fitness lifestyle customers

Strong Brand Image – Potential for Expansion – Key Risks – Valuation

12

Since expansion, Men’s and Ivivva have contributed to overall growth of 16%

Lululemon Menswearivivva

Retail Presence

1 stand-alone store in Soho, NY57 stores in North America280 stores

worldwide

Growth19% sale increase in past

quarter51% sale increase in past

quarter16% sales increase

Strong Brand Image – Potential for Expansion – Key Risks – Valuation

The ABC pant has increased same store sales by 16% alone!

13Strong Brand Image – Potential for Expansion – Key Risks – Valuation

Online sales will continue to grow with launch of mobile shopping app

14

2013 2014 2015 2016 2017 2018$0

$200

$400

$600

$800

$1,000

$1,200

Projected Online Sales Revenue

Existing Projected

Fiscal Year

Rev

enue

($

in m

illio

ns)

Strong Brand Image – Potential for Expansion – Key Risks – Valuation

Despite innovation and growth, Lululemon faces external and internal threats

15

Potential for Expansion

Key Risks

Valuation

Strong Brand Image

Strong Brand Image – Potential for Expansion – Key Risks – Valuation

• High-status reputation drives consumer demand• Unique and community-based promotions create

company leverage

• Geographic growth through domestic and global locations and sales

• Market growth through menswear, ivivva, and e-commerce

• Competitors infringing on business strategies and target market

• Instability of executive management

• Assumptions and discounted cash flow analysis• Sensitivity and risk analysis rely on loss of brand image

Competitors are making a strong push into women’s market

• Partnerships with celebrities

• $600 M was generated from women’s lines alone

• Women’s only store

• Expected growth to take Nike from $5 billion (current) to $7 billion net revenue by 2017

16

Nike Under Armour

Source: Bloomberg

Strong Brand Image – Potential for Expansion – Key Risks – Valuation

Lululemon fighting back with Athleisure wear apparel items

17Strong Brand Image – Potential for Expansion – Key Risks – Valuation

Maintaining brand image and reputation is critical to future growth

18Strong Brand Image – Potential for Expansion – Key Risks – Valuation

Management instability and controversies cause sharp drops in share prices

December 2013

Chip Wilson steps down as

chairman

May 2013CEO Christine Day resigns in wake of yoga

pants controversy

August 2014Dispute between

Wilson and board

February 2015

Wilson resigns

19Strong Brand Image – Potential for Expansion – Key Risks – Valuation

Lululemon is fairly valued; we value it at $66 per share, the current market price is $66

20

Potential for Expansion

Key Risks

Valuation

Strong Brand Image

Strong Brand Image – Potential for Expansion – Key Risks – Valuation

• High-status reputation drives consumer demand• Unique and community-based promotions create

company leverage

• Geographic growth through domestic and global locations and sales

• Market growth through menswear, ivivva, and e-commerce

• Competitors infringing on business strategies and target market

• Instability of executive management

• Assumptions and discounted cash flow analysis• Sensitivity and risk analysis rely on loss of brand image

We believe that Lululemon is fairly valued by the market at $66

Parameters Fiscal Year

2015 2016 2017 2018 2019 2020 2021

Revenue Growth Rate 13% 10% 9% 8% 8% 8% 8%

COGS/Revenue 49% 49% 48% 48% 48% 48% 48%

Tax Rate 38% 34% 34% 34% 34% 34% 34%

SG&A/Revenue 30% 29% 29% 29% 29% 29% 29%

Depreciation 3% 3% 3% 3% 3% 3% 3%

21Strong Brand Image – Potential for Expansion – Key Risks – Valuation

We believe that Lululemon is fairly valued by the market at $66

Parameters Fiscal Year ($ millions)

2014 2015 2016 2017 2018 2019 2020

Total Revenue $1,797 $1,977 $2,155 $2,327 $2,513 $2,714 $2,932

Operating Costs $1,421 $1,542 $1,659 $1,792 $1,935 $2,090 $2,257

EBIT $376 $435 $496 $535 $578 $624 $674

After-Tax Income $232 $289 $329 $356 $384 $415 $448

(+)Depreciation $58 $64 $70 $76 $82 $88 $95

(-)CAPX $120 $119 $129 $140 $151 $163 $176(-)Change in NWC $15 $20 $20 $21 $23 $24 $26Free Cash Flow $155 $215 $250 $271 $292 $316 $341

WACC: 6.92%Terminal Growth Rate: 3%

Current Share Price: $66.71Estimated Share Value: $65.70

22Strong Brand Image – Potential for Expansion – Key Risks – Valuation

Sensitivity analysis shows share value can realistically fluctuate between $41 and $141

23

Terminal Growth Rate

Weighted

Average

Cost of Capital (WACC)

1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5%

4.92% $82 $95 $113 $141 $189 $288 $623

5.42% $71 $80 $93 $111 $138 $184 $281

5.92% $62 $69 $78 $90 $108 $135 $180

6.42% $55 $60 $67 $76 $88 $105 $131

6.92% $49 $54 $59 $66 $74 $86 $103

7.42% $44 $48 $52 $58 $64 $73 $84

7.92% $40 $43 $47 $51 $56 $63 $71

8.42% $37 $40 $42 $46 $50 $55 $61

8.92% $34 $36 $39 $41 $45 $49 $54

Strong Brand Image – Potential for Expansion – Key Risks – Valuation

Lululemon is fairly valued; we value it at $66 per share, the current market price is $66

24

Potential for Expansion

Key Risks

Valuation

Strong Brand Image

• High-status reputation drives consumer demand• Unique and community-based promotions create

company leverage

• Geographic growth through domestic and global locations and sales

• Market growth through menswear, ivivva, and e-commerce

• Competitors infringing on business strategies and target market

• Instability of executive management

• Assumptions and discounted cash flow analysis• Sensitivity and risk analysis rely on loss of brand image

Strong Brand Image – Potential for Expansion – Key Risks – Valuation

Appendix

25

Lululemon Competitors

• Athleta• Zella (Nordstrom)• Calvin Klein• Zobha• Under Armour• Lily Lotus• Soybu• The Gap Inc.• Bebe stores Inc.• Target Corporation

• Prana• Victorias’ Secret• Mika Yoga Wear• Nike• Gaiam• Footlocker• Addidas AG• Reebok• Lucy Activewear• Wal-Mart Stores Inc.• Lole Inc.

*Source: Business Insider and Marketline

26

Perceptual map of competitors and branding

27

Marketing Strategy – the 3 C’s

28

Customer• 30 year old professionals with substantial income of high socio-economic background

• Loyal and addicted

• Fashionista

• Fandom Blogs

• Cult Following

Company• Vision started for

Women first

• Creates personas for each new clothing line

• “apparel chain with a tech start-up valuation”

• Integrated in community

Competition

• Athleta• Lucy• Soybu• Nike• Under Armour• Addidas

29

Marketing Strategy – the 4 P’s

Product

• Various sportswear lines

• Various accessories

• Special fabrics eg. “luon”

Price• 95% sold at full price

• Premium pricing $50 - $170

• Generally higher end on price market

• Profit-oriented business

Place• Retail storefronts

• Showrooms

• Online website

• Mobile application

• Various channel partners

Promotion• 15% discount for Yoga Teachers

• Customer loyalty

• Word of mouth

• E-commerce

• Sales promotion

Marketing Strategy – STP

30

Segmentation

• Yoga, cycling, zen and athleisure

• Health conscious individuals

Targeting

• Wealthy upper middle class

Positioning

• Eco-friendly

• Fashionable and feminine

• High-tech

• Exclusive quality

• Item scarcity

SWOT Analysis

Strengths• Innovative products and materials

• Strong community integration

• Holistic health and fitness image

• Strong customer loyalty

• Local community engagement

• Good employee benefits and treatment

• Multiple green initiatives

31

Weaknesses• Expensive products

• Still viewed as a “yoga” brand

• Short term contracts with manufacturers

• Only one manufacturer supplying innovative materials (results in product recall)

• Scarcity can turn away potential customer

• Lack of sizing variety driving away larger customers

Opportunities• Increasing marketing efforts

• Start a lululemon gym to expand past yoga

• Partnership with a larger retail store such as Target

• More international expansion

• Add more product lines e.g. ski and casual wear outside the athleisure frontier

Threats• Growing competitors from earthy brands

(Prana, Athletica, Soybu)

• Growing industry giant competitors (Nike, Under Armour)

• Bad economy

• Controversial sexist founder

Lululemon's achieves strong consumer base through strategic locations

Target Market:• Women ages 25-34• Career/ Family• Healthy lifestyle• High income

→ East Coast, urban, malls

32

CAGR – apparel net value and sales change

33

Lululemon has the highest profit margin among top 10 apparel retailers worldwide

34

Asia Pacific revenue increasing grows net revenue

35

Unique functional features

Innovative, performance-enhancing materials differentiate Lululemon’s products

Technically advanced fabrics

36

Lululemon’s feminine, flattering cuts appeal to fashion-inclined women

Mass Market Competitors Lululemon

Simple cutEmphasis on function

Tough, muscular design

Intricate strapsEmphasis on styleForm-fitting design

37

Fourth and largest distribution center will improve efficiency and cut order transit time

5.8 → 2days in transit on

the East Coast38

Lululemon’s partnership in the Middle East will contribute to Lululemon’s long term growth

• Fall 2015 Dubai

•UAE, Kuwait, Qatar, Oman, and Bahrain

•Opportunity: Dubai, UAE international shopping festival

-2009, 3.35 million visitors and AED 9.8 billion spending.

39

Lululemon's unique brand promotion techniques increase revenue

Easily distinguishable logo

Reusable Bags

Creates Partnerships

Creates a community40

North America Stores as of June 2015

41

Bibliography

• http://www.businessinsider.com/hot-brands-vying-to-be-the-next-lululemon-2013-3?op=1

• http://www.businessinsider.com/men-love-lululemon-abc-pants-2015-3

• http://www.gurufocus.com/financials/LULU

• http://www.taylordigital.com/real-value-facebook-like/

• http://valueofalike.com/

• https://simplywall.st/NasdaqGS:LULU/lululemon-athletica

• http://www.businessinsider.com/how-lululemon-gets-customers-2015-5

• http://www.businessinsider.com/lululemon-sale-2013-1

• http://www.wsj.com/articles/SB10001424052702303812904577295882632723066

• http://quotes.wsj.com/LULU

• http://www.businessinsider.com/lululemon-idea-customers-ocean-and-duke-2015-2

• http://www.businessinsider.com/men-love-lululemon-abc-pants-2015-3 42