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Case 6 Teaching Note lululemon athletica, Inc., in 2014
338
3. What do you see as the key success factors in the market for performance-based yoga
and fitness apparel?
Class members who have done some good strategic analysis and thinking should be able to make a convincing
argument for why one or more of the following qualify as being key success factors in the marketplace for
nGood product design and styling capabilities—competitors will have to stay on the cutting edge in
using high-tech moisture-wicking performance fabrics that are of good quality, that are comfortable
nStrong distribution capabilities—having good access to the buyers of performance sports apparel
is a must. This can mean having a sizable chain of company-owned retail stores or selling through
nCapabilities in building and maintaining a strong brand image and reputation—many buyers of such
nCapabilities to increase geographic coverage—being a market leader in performance-based yoga and
4. What does a SWOT analysis reveal about the overall attractiveness of lululemon’s
situation?
lululemon’s Resource Strengths and Competitive Assets
nThe company’s lineup of stylish, premium-priced yoga and fitness apparel that offers performance, fit,
and comfort
nA contingent of fitness-conscious women who view lululemon products as “must have”
nA core competence in designing stylish, appealing yoga and fitness apparel items (although there is
some reason to wonder if this core competence has not eroded rather than strengthened in the past year
or so)
Case 6 Teaching Note lululemon athletica, Inc., in 2014
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lululemon’s Resource Weaknesses and Competitive Liabilities
nEntrenched founder—Chip Wilson—who has problems with the media and who cannot let go of a
strategy
nRecent managerial turmoil and turnover and loss of faith among key stakeholders
nSupply chain management and quality control has recently been exposed as flawed in recent months
lululemon’s Market Opportunities
nOpening lululemon athletic stores in more geographic areas and in more countries
nGrowing sales at the company’s website
The External Threats to lululemon’s Future Well-Being
nDamage control and efforts to improve both design function and supply chain prove to be of little
consequence in the marketplace; important stakeholders are not mollified
nInvestors continue lackluster confidence in LULU stock, resulting in further price drops or share price
stagnation
Conclusions regarding the attractiveness of lululemon’s overall situation:
lululemon’s overall situation is unattractive, at least for the time being. Formerly, lululemon was an up-and-
coming company with potent resource strengths that were producing gains in sales and good profitability. It
had made a name for itself and developed a loyal clientele of enthusiastic customers. It had a differentiated
Case 6 Teaching Note lululemon athletica, Inc., in 2014
340
Competitor pressure is intensifying from both new entrants and incumbents. Absent needed focus on the
On balance, lululemon’s future outlook for growth and profitability seems bright—unless the new
5. What are the primary components of lululemon’s value chain?
Four primary value chain components stand out:
1. Product design and styling
2. Supply chain management
• handling the outsourcing of production to contract manufacturers and
6. What are the key elements of lululemon’s strategy?
Class members should be expected to identify the following key elements of lululemon’s strategy:
nGrow the store base in North America, primarily the United States.
nOpen additional stores outside of North America (Australia / New Zealand, Asia, and Europe)
nIncrease awareness of the lululemon brand and apparel line via showrooms and e-commerce marketing
channels
nIncorporate next-generation fabrics and technologies in the company’s products to strengthen consumer
association of the lululemon brand with technically-advanced apparel products and enable lululemon
Case 6 Teaching Note lululemon athletica, Inc., in 2014
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nMarket lululemon products to select yoga studios, health clubs and fitness centers as a way to gain the
implicit endorsement of local fitness instructors and personnel for lululemon branded apparel, familiarize
the customers of these establishments with the lululemon brand, and give them an opportunity to
conveniently purchase lululemon apparel
nUse contract manufacturers to produce lululemon products.
nMaintain limited store inventories of most lululemon apparel items (so as to never have to put unsold
nThe company’s goal was to sell all of its products at full price
nSpecial colors and seasonal items were in stores for only a limited time—such products were on three,
six, or 12-week life cycles so that frequent shoppers could always find something new. Store inventories
If you have previously covered the Under Armour case, this may be the perfect time to ask the class to
compare and contrast lululemon’s strategy with that of Under Armour.
The answer, of course, is that lululemon’s primary distribution channel is its chain of company-owned and
-operated retail stores, while Under Armour’s primary distribution channel is selling to third-party retailers
There are a couple of other significant strategy differences:
nUnder Armour’s strategy includes an initiative to rapidly grow its presence in more and more countries
nUnder Armour makes significant use of celebrity endorsements and sponsorship of sporting events to
By contrast:
nlululemon recruits local yoga and fitness instructors to be ambassadors of the lululemon brand—
nThis brings into question luluemon’s strategy to broaden its product line into competitive sports such
7. Which one of the five generic competitive strategies discussed in Chapter 5 most
closely approximates the competitive approach that lululemon is employing?
We think lululemon’s strategy is drifting from a focused to a broad differentiation strategy. The company’s
strategy to move to a broader product line signals its intent to transition to a broad differentiation strategy.
Case 6 Teaching Note lululemon athletica, Inc., in 2014
342
8. What do the data in case Exhibit 1 reveal about lululemon’s financial and operating
performance?
You should expect students to use the financial ratios in Table 4.1 of Chapter 4 in performing calculations
to determine which aspects of lululemon’s financial performance might be characterized as impressive,
improving, or not. In addition to the ratios in Table 4.1, students will also need to calculate compound average
Financial Assessment Statistics and Financial Ratios for
lululemon athletica, Inc., Fiscal Years 2009-2013
(all amounts in $ millions except EPS)
Income statements 2013
% of
Total 2012
% of
Total 2011
% of
Total 2010
% of
Total 2009
% of
Total
Net revenues $1,591.2 100.0% $1,370.4 100.0% $1,000.8 100.0% $711.7 100.0% $452.9 100.0%
Cost of Goods sold 751.1 47.2% 607.5 44.3% 431.6 43.1% 316.8 44.5% 229.8 50.7%
Gross profit 840.1 52.8% 762.9 55.7% 569.2 56.9% 394.9 55.5% 223.1 49.3%
Selling, general, and
admin expenses
448.7 28.2% 386.4 28.2% 282.3 28.2% 212.8 29.9% 136.2 30.1%
($ mil.)
4-Year CAGR%
Net Revenues 36.9%
Net Profit 48.0%
Percentage Growth, Year-over-Year
Net revenues 16.1% 36.9% 40.6% 57.1% —
Cost of Goods sold 23.6% 40.8% 36.2% 37.9% —
Gross profit 10.1% 34.0% 44.1% 77.0% —
Case 6 Teaching Note lululemon athletica, Inc., in 2014
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Balance Sheet 2013 2012 2011 2010 2009
Cash and cash equivalents $698.6 $590.2 $409.4 $316.3 $159.6
Inventories 186.1 155.2 104.1 57.5 44.1
Other 365.3 305.7 221.1 125.5 1,046.3
Total assets 1,250.0 1,051.1 734.6 499.3 1,250.0
Total debt 153.3 163.8 128.4 105.0 1,016.9
Financial Ratios 2013 2012 2011 2010 2009
Return on sales, % 17.6% 19.8% 18.5% 17.1% 12.9%
Return on assets, % 22.4% 25.8% 25.2% 24.4% 4.7%
Op. return on assets, % 31.3% 35.8% 39.1% 36.5% 7.0%
Return on equity % 25.5% 30.6% 30.5% 30.9% 25.0%
The following aspects of lululemon’s financial and operating performance ought to be identified by class
members:
From FY2012 to FY2013, growth rates in just about all revenue and profitability categories slackened
considerably, with the sole exception of Cost of Goods Sold, which grew at 23.6% in FY 2013 vs. 36.9%
Gross margins dropped from 55.7% in FY2012 to 52.8% in FY2013, most likely reflecting a markdown
Net income as a percentage of sales (or return on sales) dropped from 19.8 % in FY 2012 to 17.6% in
FY2013, and there were similar declines in returns on assets (from 25.8% to 22.4%), operating returns
Total asset turnover dropped slightly between FY2012 to FY2013, from 1.30x to 1.27x, reflective of
declining revenue growth in relation to the number of new outlets opened in the year (43).
Case 6 Teaching Note lululemon athletica, Inc., in 2014
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Advanced students may observe that:
Free cash flows (Net cash provided by operating activities—Capital expenditures) continue to be robust.
Based on the table below, free cash flows appear to sufficient to fund future expansion at an approximate
cost of $2.5 million per new store. Also, lululemon has unused debt capacity to aid in that expansion—
2014 2013 2012 2011
Number of stores @end of period 254 211 174 133
Incremental # of stores in year 43 37 41 23
Cap Exp. $106.4 $93.2 $116.7 $30.4
Est. Cost per new store ($ mill.)
9. What 3-4 top priority issues do CEO Laurent Potdevin and lululemon management need
to address?
We think it is always a good idea to push the class for their assessment of what issues management needs
to address before proceeding to ask for action recommendations. Issue identification (or compilation of a
“what I’d do if I were in her/his shoes” list) is a way for students to draw conclusions from all the preceding
analysis, plus it sets the stage for what actions need to be taken.
In lululemon’s case, we see several high-priority issues meriting priority consideration:
nHow to repair the damage from the March 2013 luon recall, the company’s glacially slow response, and
nHow fast and how far to expand lululemon’s product offerings into additional sports apparel and
recreational apparel categories? Should the company continue to focus mainly on yoga and related
nHow rapidly and by what means to expand the distribution of lululemon products to foreign markets
outside North America and in which countries/geographic regions should it concentrate its foreign
nIn foreign country markets, should lululemon continue to avoid the use of franchising and open only
company-owned and -operated retail stores?
nShould lululemon consider selling to independent third party retailers as a third distribution channel,
especially as a means of entering foreign markets?
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10. What recommendations would you make to incoming lululemon CEO Laurent Potdevin?
At a minimum, your recommendations should cover what to do about each of the top
priority issues identified in question 9.
Students should be pressed to offer practical action recommendations to address the issues identified in the
prior question. In our view, most all of the front-burner issues at lululemon relate to the inextricable linkage
between its product design function, sourcing and quality control functions, brand image and equity, and
Clearly, in the near-term, the new executive team at lululemon needs to focus on repairing the damage from
the product recall in existing retail markets, and on rapid expansion of retail outlets in markets outside of
Founder Chip Wilson’s continued role as board chairman surely needs to be re-evaluated.
A good case can be made that Wilson needs to step aside, or perhaps even leave the company entirely. His
philosophy—regarding how plus-size women are not suited to lululemon’s apparel—and pronouncements
that plus-size women may have been the cause of its recent problems are likely to have offended some
fraction of the company’s customers and contributed to the sales falloff. At least some students should
There are issues that Potdevin and Tara Poseley (the new Chief Product Officer) must resolve in order
that the business be able to sustain future growth, much less return to lululemon’s prior position as the
unquestioned fast-growing category leader.
The following recommendations seem to us to be actions that students might reasonably propose:
There are several key strategy elements that lululemon management might think about modifying:
nRe-build consumer trust in the lululemon brand and enhance the company’s brand reputation by:
• Becoming more inclusive to women of all shapes and sizes via design changes
• Offering free replacement products or full refund guarantees on all products
nReconsider use of the luon fabric, possibly reformulating or phasing it out, and continue to seek out
innovative fabrics for fitness apparel that enhance performance, comfort, and product quality and to
Case 6 Teaching Note lululemon athletica, Inc., in 2014
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nContinue to use contract manufacturers to produce lululemon products—integrating backward into
manufacturing should be avoided (What are the benefits? Is it too risky? Will it avoid a repeat of the luon
nFocus on stellar quality, stellar execution, and building stellar relationships with consumers of all shapes
and sizes.
nRe-think the move to a broad differentiation strategy. A case can be made that straying very far from
designing and marketing apparel items that are not complementary or “similar” to what is worn for
yoga and related kinds of workout/fitness/recreational activities pits luluemon in head-on competition
with much larger, better capitalized rivals, such as Nike and Adidas-Reebok, that have proven design
capabilities and impeccable brand equity. In our view, lululemon has no business in designing/marketing
nContinue to expand into additional foreign countries and geographic regions of the world as fast as
internally generated funds will permit. We suspect expansion into Europe should carry a higher priority
than expansion into Asia (with the possible exception of Japan). However, there seems to be ample
opportunity to continue to open the majority of the company’s new retail stores in the United States
for several more years at least. There should be room in the U.S. market for 250–350 lululemon stores
before having to worry much about lululemon stores cannibalizing sales from one another because the
The case does not provide enough information for students to offer sound recommendations about
which European countries or Asian countries should carry the highest priority for expansion. But
because of the logistics costs of supplying foreign store locations with lululemon products and also
introducing customers to the lululemon brand, we suspect that lululemon’s strategy of entering Europe
nBased on the company’s prior retrenchment from franchising, it makes sense to continue to avoid
franchising and to stick with opening only company-owned and -operated retail stores. lululemon seems
nWe suspect most class members will be hesitant to recommend adding third-party retailers as a new
distribution channel for lululemon products. There does not seem to be any compelling reason to expand
Case 6 Teaching Note lululemon athletica, Inc., in 2014
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While independent retailers could be used as a distribution channel in the markets of foreign countries, it
is doubtful that such would prove to be as profitable or as effective from a brand-building standpoint as
opening company-owned stores. Using lululemon stores and recruiting fitness instructors as lululemon
Epilogue
On August 7, 2014. The company announced that Chip Wilson and Advent had entered into an agreement under
which Advent would acquire approximately 50% of Mr. Wilson’s ownership in lululemon, or approximately
13.85% of the Company’s outstanding shares, for approximately $845 million. The transaction received the full
support of the lululemon Board of Directors.
In its 10-Q filing on September 11, 2014, lululemon management wrote:
Fiscal 2014 is a transitional year, as we focus on building a scalable foundation to support and drive growth in
our businesses. In addition to our plans for North American and international expansion, we are also focused
on initiatives related to help boost our brand experience, connecting with our guests and communities, and
creating innovative, technical and beautiful product. We continue to invest in our product quality and supply
chain, as we believe this is the foundation of our guest loyalty. Our focus on building foundation will also
extend to our other categories, including our men’s and ivivva business, where we see potential for future
expansion. We believe our strong cash flow generation, solid balance sheet and healthy liquidity provide us
with the financial flexibility to execute the initiatives which we believe will continue to lead our profitable
growth.
Throughout the first two quarters of fiscal 2014, we were able to grow our e-commerce business, which
we believe has further increased our brand awareness and has made our product available in new markets,
including those outside of North America. Net revenue from our direct to consumer channel increased 25%
and, represented 16.7% of total revenue in the first two quarters of fiscal 2014 compared to 15.0% of total
revenue in the same period of the prior year. Continuing increases in traffic on our e-commerce website lead
us to believe that there is potential for our direct to consumer segment to become an increasingly substantial
part of our business and we plan to continue to commit a significant portion of our resources to further
developing this channel.
We increased our store base through execution of our real estate strategy, when and where we saw
opportunities for success. We opened seven net new corporate-owned stores during the second quarter of
fiscal 2014. We also opened our East Coast distribution center in Columbus, Ohio during the second quarter
of fiscal 2014. Where we find opportunities for growth through opening showrooms, or other community
presence efforts, we expect to expand our store base and therefore our business. Our growth strategy relies
on expansion in North America, particularly in the United States. We also believe that international growth
is an opportunity and are expanding our foothold in markets by establishing local community connections,
distributing to strategic sales partners and opening showrooms where we believe we can successfully seed
the markets.
Our net revenue increased from $1.4 billion in fiscal 2012 to $1.6 billion in fiscal 2013, representing an
annual growth rate of 16%. Our net revenue also increased from $344.5 million in the second quarter of
fiscal 2013 to $390.7 million in second quarter of fiscal 2014, representing an 13% increase, and total
comparable sales, which includes comparable store sales and direct to consumer, decreased 1% in the second
quarter of fiscal 2014 compared to the second quarter of fiscal 2013. Excluding the effect of foreign currency
fluctuations, total comparable sales would have remained flat. Our ability to open new stores has been driven
by increasing demand for our technical athletic apparel and a growing recognition of the lululemon athletica
brand. We believe our superior products, strategic store locations, inviting guest experience, and distinctive
corporate culture are responsible for our strong financial performance.
Case 6 Teaching Note lululemon athletica, Inc., in 2014
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We have three reportable segments: corporate-owned stores, direct to consumer and other. We report our
segments based on the financial information we use in managing our businesses. While we prepare financial
information for each corporate-owned store, we have aggregated all of the corporate-owned stores into one
reportable segment due to the similarities in the economic and other characteristics of these stores. Our direct
to consumer segment accounted for 16.2% of our net revenue in second quarter of fiscal 2014, compared to
14.3% in the second quarter of fiscal 2013. Our other segment, consisting of sales from company-operated
showrooms, sales to wholesale accounts, outlets and warehouse sales, accounted for less than 10% of our
net revenue in the first two quarters of fiscal 2014 and fiscal 2013.
Results of Operations—Thirteen-Week Results
The following table summarizes key components of our results of operations for the thirteen weeks ended
August 3, 2014 and August 4, 2013. The operating results are expressed in dollar amounts. The percentages
are presented as a percentage of net revenue.
Thirteen Weeks Ended 8/3/14 and 8/4/13 (Percentages)
(In thousands) 2014 2013 2014 2013
Net revenue $390,708 $344,513 100.0 100.0
Cost of goods sold 193,401 158,558 49.5 46.0
Gross profit 197,307 185,955 50.5 54.0
Selling, general and administrative expenses 129,419 106,969 33.1 31.1
Income from operations 67,888 78,986 17.4 22.9
Other income (expense), net 1,890 1,295 0.5 0.4
Income before provision for income taxes 69,778 80,281 17.9 23.3
Provision for income taxes 21,030 23,816 5.4 6.9
Net income $48,748 $56,465 12.5 16.4
Net Revenue
Net revenue increased $46.2 million, or 13%, to $390.7 million for the second quarter of fiscal 2014 from
$344.5 million for the second quarter of fiscal 2013. Assuming the average exchange rates for the second
quarter of fiscal 2014 remained constant with the average exchange rates for the second quarter of fiscal
2013, our net revenue would have increased $51.3 million, or 15%.
The net revenue increase was driven by sales from new stores opened and the growth of our direct to
consumer segment. Total comparable sales, which includes comparable store sales and direct to consumer
decreased 1% in the second quarter of fiscal 2014 compared to the second quarter of fiscal 2013. Excluding
the effect of foreign currency fluctuations, total comparable sales would have remained flat.
Pertinent Analyst Comment Corinna Freedman, an analyst at Wedbush Securities in New York, said in a
phone interview with Lindsey Rupp of Bloomberg News, on March 27, 2014:
…product and supply chain issues have been plaguing the company for the past year. It is an extremely
competitive landscape, and operating at that premium price point is going to require stellar execution.
For the latest information on developments at lululemon athletica, please visit the Investor Relations section at
www.lululemon.com and check out the company’s recent press releases and financial results.
