Case 9 Teaching Note Lululemon Athletica, Inc., in 2016: Can the Company Get Back on Track?
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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
sports apparel made of performance fabrics, and most especially in the narrower segment where lululemon
currently competes—performance-based yoga and fitness apparel:
Good 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
to wear, and that have appealing, fashionable, and stylish designs. Management of the supply chain to
assure quality control is a very high priority for rivals, particularly in light of lululemon’s luon fiasco in
2013.
apparel are brand-conscious and brand-loyal.
Capabilities 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
The company’s lineup of stylish, premium-priced yoga and fitness apparel that offers performance, fit,
and comfort
A contingent of fitness-conscious women who view lululemon products as “must have”
The company’s success in recruiting local yoga and fitness instructors as ambassadors for lululemon’s
products adds authenticity and credibility to the lululemon name
Good marketing and brand-building capabilities—the company has succeeded in creating a differentiated
product offering
Case 9 Teaching Note Lululemon Athletica, Inc., in 2016: Can the Company Get Back on Track?
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lululemon’s Resource Weaknesses and Competitive Liabilities
Recent managerial turmoil and turnover, coupled with founder Chip Wilson’s criticism of how the
company is being run (is he right? Or is he grumbling because his ideas are not highly valued or thought
to be accurate by current management). Is the company’s $64 stock price a reection of investor concern
about the company’s perhaps dimmer prospects?
lululemon’s Market Opportunities
Opening lululemon athletica stores in more geographic areas and in more countries
The External Threats to lululemon’s Future Well-Being
More women begin to view other brands (particularly Athleta) as good substitutes for lululemon’s
products
Large department store chains introduce their own private-label fitness apparel for women at lower price
points
Premium fitness apparel for women proves to be a short-lived fad
Conclusions regarding the attractiveness of lululemon’s overall situation: lululemon’s overall
situation is potentially attractive, at least for the time being. Prior to the luon recall in 2013, 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 product offering that enabled it to command premium prices for its product offering.
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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
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:
Grow the store base in North America, primarily the United States.
Open additional stores outside of North America (Australia / New Zealand, Asia, and Europe)
Design products that only smaller/trimmer, fitness-conscious women can wear comfortably and still be
“attractive-looking.”
Provide a distinctive in-store shopping experience, complemented with strong ties to fitness instructors
and fitness establishments, local athletes and fitness-conscious people, and various community-based
athletic and fitness events
Maintain limited store inventories of most lululemon apparel items (so as to never have to put unsold
items on sale at discounted prices) and also frequently add new colors/fabric designs so that returning
shoppers (attendees at free in-store yoga classes) will find new things to buy each time they visit the
store
Case 9 Teaching Note Lululemon Athletica, Inc., in 2016: Can the Company Get Back on Track?
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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
of sports apparel, especially such notable chain retailers as Dick’s, the Sports Authority, regional chains like
Academy Sports and Hibbett’s.
There are a couple of other significant strategy differences:
By contrast:
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 migrating from a tightly-focused strategy on yoga apparel for fitness-
conscious women towards a broad differentiation strategy. The company’s strategy to offer a bigger selection
8. What do the data in case Exhibit 1 reveal about lululemon’s financial and operating perfor-
mance?
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
growth rates (CAGR) for certain financial measures. The formula for calculating CAGR (in percentage
terms) is as follows:
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See table below for highlights:
Financial Assessment Statistics and Financial Ratios for lululemon athletica, Inc.
Fiscal Years 2011-2015
(all amounts in $ millions except EPS)
Income statements 2015
% of
Total 2014
% of
Total 2013
% of
Total 2012
% of
Total 2011
% of
Total
Net revenues $2,060.5 100.0% $1,797.2 100.0% $ 1,591.2 100.0% $1,370.4 100.0% $ 1,000.8 100.0%
Cost of goods sold 1,063.4 51.6% 833.0 49.1% 751.1 47.2% 607.5 44.3% 431.6 43.1%
Net profit (loss) 266.0 12.9% 239.0 13.3% 279.5 17.6% 271.4 19.8% 185.0 18.5%
EPS–basic $1.90 $1.66 $1.93 $1.88 $1.29
diluted 1.89 1.66 1.91 1.85 1.27
Number of stores, end
of year 363 302 254 211 174
Sales per square foot $1,541 $ 1,678 $1,894 $ 2,058 $ 2,004
4-Year CAGR%
Net Revenues 19.8%
Net Profit 9.5%
Percentage Growth, Year-over-Year
Net revenues 14.7% 12.9% 16.1% 36.9% 40.6%
Cost of goods sold 27.7% 10.9% 23.6% 40.8% 36.2%
Balance Sheet 2015 2014 2013 2012 2011
Cash and cash equivalents $ 698.6 $ 590.2 $ 698.6 $ 590.2 $409.4
Inventories 186.1 155.2 186.1 155.2 104.1
Total assets 1,250.0 1,051.1 1,250.0 1,051.1 734.6
Stockholders’ equity 1,096.7 887.3 1,096.7 887.3 606.2
Financial Ratios 2013 2012 2013 2012 2011
Return on sales, % 12.9% 13.3% 17.6% 19.8% 18.5%
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The following aspects of lululemon’s financial and operating performance ought to be identified by class
members:
Gross profit margins have declined every year since FY 2011 (declining from 56.9% to 48.4% in FY
2015).
Average sales per company-owned stores open at least one year have declined every year since FY
2012; so, have sales per gross square foot.
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:
How to rejuvenate sales at lululemon’s stores open at least one year and boost overall company
profitability
How 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
fitness apparel? Should the company focus more heavily on apparel items for women and young females
than for men and young boys?
In foreign country markets, should lululemon continue to avoid the use of franchising and open only
company-owned and -operated retail stores?
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Since direct-to-consumer sales is the most rapidly growing aspect of this business, how to more
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
future global expansion strategy — and how best to rekindle the company’s past growth. Having begun to
repair the damage to its brand by making two key changes in upper management, lululemon seems to us to
be taking the right initial steps.
The following recommendations seem to us to be actions that students might reasonably propose:
There are several key strategy elements that students might reasonably propose for lululemon management
to continue and try to execute more effectively and efficiently:
Recruiting local fitness instructors as ambassadors of the lululemon brand and conducting free yoga
classes weekly at lululemon stores.
Continuing to seek out innovative fabrics for fitness apparel that enhance performance, comfort, and
product quality and to come up with innovative/appealing/fashionable designs and styles as compared
to the designs/styles of rival brands.
Don’t go overboard on moving 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 lululemon in head-on
competition with much larger, better capitalized rivals, such as Nike and Adidas-Reebok, that have
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Continue 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
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
Based on the company’s prior retrenchment from franchising, it makes sense to continue to avoid
One new/different strategic move that students might propose includes the following:
Consider offering lululemon products in bigger sizes
In our view, the most important things that lululemon must succeed in doing to get the company back on
track to sustained growth and profitability are the following:
Ensure the company’s products are designed in ways that are highly appealing to customers. This means
Continue to provide shoppers with a very satisfying in-store shopping experience
The ideal outcome is for lululemon apparel to enjoy “must have” status among a big percentage of fitness-
conscious women.
We 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 9 Teaching Note Lululemon Athletica, Inc., in 2016: Can the Company Get Back on Track?
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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
Epilogue
In December 2016, the company announced its financial results for the third quarter ending October 30, 2016.
Highlights included the following:
Net revenue increased by 13% to $544.4 million from $479.7 million in the third quarter of fiscal 2015.
Total comparable sales, which includes comparable store sales and direct to consumer, increased by 7%.
Income from operations increased by 36% to $93.0 million from $68.2 million in the third quarter of
fiscal 2015, and as a percentage of net revenue was 17.1% compared to 14.2% of net revenue in the third
quarter of fiscal 2015.
Lululemon ended the quarter with 389 company-owned stores in operation, totaling 1.14 million square feet.
The company also announced that its board of directors had approved a stock repurchase program for up to $100
million of its common shares in the open market at prevailing market prices.
Case 9 Teaching Note Lululemon Athletica, Inc., in 2016: Can the Company Get Back on Track?
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The company’s consolidated income statement for the third quarter of fiscal 2016 and the first nine months of
fiscal 2016 was as follows:
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Amounts in thousands, except per share amounts)
Thirteen Weeks
Ended
October 30, 2016
Thirteen Weeks
Ended
November 1, 2015
Thirty-Nine
Weeks Ended
October 30, 2016
Thirty-Nine
Weeks Ended
November 1, 2015
Net revenue $544,416 $479,693 $1,554,452 $1,356,247
Cost of goods sold 265,990 254,896 782,734 713,548
Gross profit 278,426 224,797 771,718 642,699
Selling, general and administrative
expenses 185,451 156,619 547,195 439,906
Other comprehensive (loss) income:
Foreign currency translation adjustment (24,748) (665) 20,762 (17,427)
Comprehensive income $ 43,537 $ 52,488 $ 188,008 $ 131,204
Basic earnings per share $ 0.50 $ 0.38 $1.22 $1.05
For the first nine months of 2016, net revenues at company-operated stores totaled $1.13 billion compared to
$1.0 billion for the first nine months of 2015. For the first nine months of 2016, lululemon’s website sales totaled