CAMBRIAN GROUP

strategic report

CAMBRIAN GROUP

Lululemon

CAMBRIAN GROUP

TEAM MEMBERS

Charles Sander, Lead

Richard Creedon

Matthew Jevsevar

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COPYRIGHT NOTICE © 2011 Cambrian Consulting, LLC. All rights reserved. This material may not be reproduced, displayed, modified or distributed without the express prior written permission of the copyright holder and the Client.

CONSULTANT�’S DISCLAIMER Cambrian Consulting, LLC (�“Cambrian�”) has prepared this report (�“report�”) at the request of the Client and for the sole use of the Client. This report may not be relied upon by any other party without the express written agreement of Cambrian. The use of this report by unauthorized third parties without written authorization from Cambrian shall be at their own risk, and Cambrian accepts no duty of care to any such third party.

Cambrian has exercised due and customary care in conducting this report but has not, except as specifically stated, independently verified information provided by others, including the Client. Cambrian makes no representations or warranty as to the accuracy, completeness or correctness of the information and statistical data contained herein.

No other warranty, express or implied is made in relation to the conduct of this report of the contents of this report. Therefore, Cambrian assumes no

liability for any loss resulting from errors, omissions, or misrepresentations made by others.

Any recommendations, opinions, or findings reflect the judgment of Cambrian at the date of publication and are subject to change at any time without notice. Any recommendations, opinions, or findings stated in this report are based on circumstances and facts as they existed at the time Cambrian performed the work. Any changes in such circumstances and facts upon which this report is based may adversely affect any recommendations, opinions, or findings contained in this report.

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TABLE OF CONTENTS EXECUTIVE SUMMARY�…�…�…�…�…�…�…�…�…...............................�…�….�…�…�…�…�…�…�…�…..�….1

PART I: INTRODUCTION COMPANY OVERVIEW�…�…�…�…�…�…�…�….�…�…�….�…�…�…�…�…�…�…�…�…�….�…�…�…�…�…..�…..�…..5

PART II: ANALYSIS COMPETITIVE ANALYSIS�…�…�…�…�…�….�…�…�…�…�…�…�…�….�…�…�…�….�…�…�…�…�…�…�…�…�…�…�….9 Internal Rivalry�…�…�…..�…..�…�…�…�…�…�…�…�….�…�…�…�…�…�…�…�…�…�…�…�…�…�…�….10

Entry Threat.................�…�…�…�…�…�…�…�…�…�…�….�…�…�…�…�…�…�…�…�…�…�…�…�…�…12

Supplier Power.�…�…�…�…�…�…�…�…�…�…�…�…�…�….�…�…�…�…�…�…�…�…�…�…�…�…�…�…13

Buyer Power.�…�…�….....�…�…�…�…�…�…�…�…�…�…�….�…�…�…�…�…�…�…�…�…�…�…�…�…�…15

Substitute and Complement Products.....�…�…�….�…�…�…�…�…�…�…�…�…�…�…�…�…�…15

FINANCIAL ANALYSIS�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…..17 Revenue................................�…�…�…�…�…�….�…�…�…�….�…�…�…�…�…�…�…�…�…�…�…�…�…17

Profitability...........................�…...�…�…�…�….�…�…�…�….�…�…�…�…�…�…�…�…�…�…..�…�…..18

SWOT ANALYSIS..�…�…�…�…�…�…�…�…�…�…..�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…...21 Strengths�…�…�…�…�…�…�…�…�…�…�…..�…�…�….�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…..�…..21

Weaknesses�…�…�…�…�…�…�…�…�…�…�…�…�….�…�…�…�…�…�…�…�…�…�…�….......................22

Opportunities�…..�…..�…�…�…�….�…�…�…�…�….�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…...�….23

Threats�…�…�…�…�…�…�…�…�…�…�…�…�…�…�….�…�…�…�…�…�…�…�…�…�…�…........................23

PART III: RECOMMENDATIONS STRATEGIC RECOMMENDATIONS�…�…�…�…�…�…�…�…�…�…�…�….�…�…�…�…�…�…�…�…�…�…�…�….26

Challenges..............................�…�….�…..�…�…..�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…..26

Near-Term Recommendations..................�….�…�…�…�…�…�…�…�…�…�…�…�…�…�…�…�….26

Long-Term Recommendations..................�…....�…�…�…�…�…�…�…�…�…�…�…�…�…�…�….29

REFERENCES.......�…�…�…�…�…�…�…�…�…�…�…..............................�…�…�…�…�…�…�…�….�…�…�…...32

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EXECUTIVE SUMMARY In early 2011, lululemon athletica�’s management team retained Cambrian Consulting to provide strategic advise on their current growth strategy. lululemon is a yoga-inspired clothing brand that specializes in delivering a high-quality, technically-innovative, and stylish product. By originally appealing to young and health conscious women, lululemon has built a strong brand name that has become synonymous with leading a healthy, balanced, and fit lifestyle. lululemon�’s distinctive retail experience is driven by corporate-owned retail locations that are strategically positioned in community centers. lululemon management believes that their community-centered approach to retail and marketing is a key comparative advantage.

lululemon has experienced tremendous revenue growth in the past four years, averaging 61% yearly growth. The company is currently revamping their e-commerce offerings and must take special care to embody their distinctive retail strategy within their online store. lululemon must also expand key product lines to capitalize on their already-loyal customer base. Increased product offerings and a greater online presence will increase lululemon brand awareness and help ensure the success of an eventual expansion overseas.

This strategic report will identify and analyze the key issues currently affecting lululemon and provide near-term and long-term strategic recommendations. The report consists of five main sections: Company Background, Competitive Analysis, Financial analysis, SWOT Analysis, and Strategic Recommendations.

Cambrian Consulting recommends that lululemon focuses on the following initiatives:

�• Expand direct to consumer distribution

o A top-tier online store will allow lululemon to reach a much broader customer base and attract affluent customers who may not live near a city center.

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o An online presence is also a necessary prerequisite for lululemon�’s eventual expansion into overseas markets.

o However, lululemon must be careful to emulate the distinct retail experience inside a brick and mortar store in their e-commerce site.

�• Expand product offerings and existing lines

o lululemon�’s already-existing men�’s line is an obvious candidate for extension.

o Outerwear gives lululemon an incredible opportunity to penetrate another aspect of their customers�’ lives.

o Although lululemon currently markets a number of products known to be good apparel choices for pregnant women, a dedicated maternity line may attract females that may not have been as yoga-minded or health-conscious before becoming pregnant.

o Apparel for young children is a logical extension from maternity and babywear.

�• Introduce customer loyalty programs

o Customer loyalty programs can be very effective measures to facilitate repeat buying, especially for goods with relatively high price points.

o Customer loyal can also be fostered through the creation of an online community.

�• Pursue strategic partnerships

o To effectively compete within the athletic apparel market, lululemon must eventually pursue strategic partnerships comparable to those of Nike and adidas.

�• Expand into overseas markets

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o When expanding, it is important that lululemon utilizes the distribution channels that joint ventures can offer.

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PART I INTRODUCTION

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COMPANY OVERVIEW Founded in 1998, lululemon athletica (commonly referred to as �“lululemon�” or �“lulu�”) is a yoga-inspired athletic apparel company that specializes in designing and producing a trendy high-end athletic clothing line. Although originally founded to address the needs of athletically minded women, lululemon has expanded its offerings to include products for men and young women who appreciate lululemon�’s ability to produce at the intersection of function and style. Further, the relatively recent success of

lululemon has lead its brand name beyond the athletic realm to be associated with those who seek to live a healthy and balanced life.

After completing the first commercial yoga class offered in Vancouver BC, lululemon founder, Dennis �“Chip�” Wilson, decided to use his experience from previous forays into the surf, skate, and snow business to begin lululemon athletica in a small Vancouver studio. A design studio by day, the space was converted into a yoga studio each night to accommodate yoga

classes taught to supplement the rent. Wilson believed that yoga provided the best method to preserve good health with age and molded lululemon to take advantage of the increasing number of females adopting the sport.i

The first real lululemon store was opened in the Vancouver BC beach neighborhood of Kitsilano in November of 2000. Including a design and yoga studio, the store was meant to serve as a community hub where people

could come and be educated about the positive impacts of maintaining a healthy and balanced lifestyle�—an integral part of the yoga mentality. Unfortunately, the success of the first store brought an overwhelming number of people and eventually lululemon employees were able to do little besides help customers with their purchases. Although he had originally planned to open only one store, Chip Wilson realized that it was time for lululemon to expand beyond its Vancouver roots.1

lululemon�’s innovative ability to mix performance and design in its core clothing lines has allowed maintain a high rate of growth since it�’s founding in 1998. As of January 31, 2010, lululemon branded products were principally sold from 124 different stores spanning primarily the US and

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Canada. lululemon is also sold out of various health clubs and yoga studios that lululemon deems to be centers of the regional fitness community. Despite its expansion, lululemon has remained committed to a distinctive community-centric retail experience. lululemon employees continue to be trained as �“educators�” with the ability to fully disclose the innovative aspects of each product.ii

In 2005, a US private equity firm called Advent International (partnered with Highland Capital Partners) acquired a 48% minority stake in lululemon athletica through the purchase of approximately CAD $225 million worth of Lulu stock. The capital infusion also brought a change in upper management and Robert Meers, formerly of Reebok, was installed as lululemon CEO. After the new capital, it was reported that founder Chip Wilson still retained a 42% interest in the company with the other 10% of lululemon shares belonging to retail staff. lululemon also formed a partnership with Descente of Japan to help distribute their products throughout Japan but the partnership fell through in mid-2008 when lululemon closed its Japanese operations in order to focus on the American market. As of late-2010, leadership responsibilities at lululemon were transferred to Christine Day, who brings over 20 years of previous experience at Starbucks.2

In May of 2007, lululemon announced that it had filed for a public stock offering. lululemon joined the NASDAQ stock exchange with a ticker of LULU on July 27, 2007, after Chip Wilson had rang the opening bell. lululemon is also currently traded on the Toronto Stock Exchange under the ticker LLL. Originally priced at $18 per share, lululemon�’s subsequent success has led the stock to be currently valued at over $76 per share.

lululemon�’s success, however, has not come without some scandal. In November of 2007, The New York Times published a self-commissioned study claiming that lululemon�’s VitaSea fabric, claiming to provide �“anti-inflammatory, antibacterial, hydrating and detoxifying benefits�”, in fact showed no discernable differences from cotton.iii A hurried study by lululemon quickly denounced the NYT article�’s findings and confirmed the seaweed content of the VitaSea fabric. Nonetheless, a subsequent demand from the Canadian Competition Bureau forced lululemon to remove all tags that claimed unsubstantiated health effects from VitaSea garments.iv

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Late 2009 brought more dispute with lululemon�’s release of their "Cool Sporting Event That Takes Place in British Columbia Between 2009 & 2011 Edition", an obvious reference to the 2010 Olympic Games. Under Canada�’s Olympic and Paralympic Marks Act, no company may use the words Olympic(s), Vancouver, or 2010 without being an explicit sponsor of the Canadian National Team. Members of the Olympic Committee acknowledged that although no crime had been committed, they were very disappointed in the sportsmanship of the local Canadian company.v Throughout the incident, lululemon maintained that it was simply offering its continued support to Canadian athletes across the globe.

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PART II ANALYSIS

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COMPETITIVE ANALYSIS Force Threat to Profits

Internal Rivalry High

Entry Threat High

Supplier Power High/Medium

Buyer Power Low

Substitutes Medium/Low

Complements Low

lululemon athletica is a designer and retailer of yoga-inspired athletic apparel with its primary operations in North America. The apparel is sold under the brand name lululemon athletica and is primarily targeted towards affluent, active, healthy, and educated women. By targeting a very precise customer segment, lululemon has successfully established a market foothold with its premium brand in a fragmented industry that is dominated by major competitors. Although the firm was founded to address a perceived women�’s athletic apparel shortage, the firm has successfully launched a small but growing number of products for men and young females. lululemon also recognizes the need to exploit the athletic participation of the �“Baby Boomer�” and plans to gradually shift resources that market over the long term. lululemon faces direct competition from larger wholesale and direct retailers of athletic apparel such as Nike, Reebok, adidas AG, and Under Armour, Inc. lululemon also faces direct competition from specialty retailers focused on women�’s athletic apparel such as Lucy Activewear, Inc., The Gap, Inc., and bebe stores. Competition in the athletic apparel retail market is principally organized around brand image, product quality, innovation, style, and distribution techniques.

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In order to better understand the image that lululemon is seeking to portray, a brief discussion of their marketing strategy is necessary. Since product differentiation and brand image are keys to success in specialty retailing, lululemon management has developed a community-based marketing approach. A multi-faceted strategy that includes social media and partnerships with local fitness instructors and premium training locations is employed to ensure broad product penetration and brand loyalty. Within each retail location, a dedicated community coordinator organizes fitness and philanthropic events designed to portray the retail location as a �“yoga mecca�” within the community. Further, advertising is undertaken to promote various forms of non-price competition as lululemon targets an affluent portion of the market.

Internal Rivalry

lululemon athletica�’s strong premium brand name has enabled the firm to engage in forms of non-price competition such as the use of a feedback-based design process, advanced manufacturing techniques, and cutting-edge fabrics. Their brand strives to design clothing that incorporates the latest materials into a technical, functional, and stylish product. In order facilitate and maintain their strong brand name, lululemon uses a vertically integrated distribution and retailing network approach.

lululemon uses an innovative retail concept that focuses on providing the customer with a retail experience focused on providing an inviting and educational environment. While the company began with franchised stores, all new stores are corporate owned and located in �“lifestyle centers�” and malls. The transition to corporately owned stores coincided with their

initial public offering and reflects management�’s decision to maintain a higher degree of control over the retail experience. Management�’s use of franchised stores before going public was also predicated on cheaper access to capital and a more flexible approach by partnering with franchisers. The smaller size of their boutiques, averaging just over 2,800 square feet for fiscal year 2009, has allowed them to average same-store sales of $1,318 for stores open more than a year. Although average same-store sales were down slightly from 2008, lululemon is still an industry leader among apparel retailers and will continue to be a strong competitor. lululemon�’s management has identified the United States as the primary expansion

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market and opened seven additional stores during fiscal year 2009. Net revenue has increased from $40.7 million in FY 2004 to $452.9 million in FY 2009 underscoring a period of explosive growth for lululemon.2 In the short term, lululemon may be able to continue to grow at an above average rate compared to their competitors but it is largely dependent on management�’s ability to grow the brand in both core and frontier markets without alienating there core clientele.

As mentioned above, lululemon has been able to target a small target segment of the fitness market through the use of non-price competition. By recognizing that consumer purchase decisions are driven by a need for

functional fitness apparel and a desire to maintain a certain image and fashion sense, lululemon has successfully differentiated its product from traditional athletic retailer brands such as Nike and Reebok. While management has been successful to date, the company must be careful to respond to consumer preferences by constantly updating and redesigning

its product line so the brand avoids becoming a fad. Additionally, management must avoid allowing financial analysts�’ profit predictions or other market-drive strategies dissuade it from the continued use of their consumer-driven strategy. Management has striven to maintain their strategy through a distinctive retail experience and design process. Each of

these approaches is facilitated through the use of corporately owned retail locations.

Following their target audience, the company has developed a highly informative and personal retail experience. Sales associates, referred to as �“educators�”, receive around 30 hours of in-store training within the first three months of their employment. During this training, employees are

educated about the technical and design aspects of each and every product in the retail space in order to better handle customer needs. All employees are strongly encouraged to represent the company through the pursuance of strong personal fitness and an overall healthy lifestyle. More than the in-store experience, lululemon�’s innovative design process has allowed the company to further differentiate itself.

The product development team, led by founder Dennis Wilson, employs a feedback-based design system in which input is actively sought from customers and local fitness instructors. While this has led to lululemon

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capturing their target audience, it has also allowed the firm innovate extremely quickly. Products are typically brought to market in eight to ten months, but through the combination of their retail strategy and design process products may be brought to market in as little as one month. This provides the company with a distinct advantage and unmatched ability to respond to customer feedback, market conditions, and apparel trends. Although this product pipeline has distinct advantages, such as defending brand name and responding to changing consumer tastes, it can also results in a touch-and-go supply situation as discussed below.

Entry Threat

lululemon athletica principally operates in the women�’s premium athletic apparel segment of the specialty retail industry. Since the industry is categorized by fierce competition, the potential of threat of entry to lululemon�’s business is high. The company�’s chief competitors are much larger wholesales and direct retailers of athletic apparel such as Nike, Inc. and adidas AG. In addition to the larger athletic apparel conglomerates, lululemon also faces competition from the threat of entry by smaller firms specializing in premium yoga apparel.

It is difficult to distinguish between the exact market segments that many of the larger corporations are competing for since their products are often marketed as �“general fitness�’�” apparel. In many industries designs are protected by some type of intellectual property rights, which makes entry difficult without an ex-ante knowledge advantage. Since lululemon generally does not have intellectual property protection, the threat of entry is exacerbated. In fact, the majority of the intellectual property protection

that exists for the technology, fabrics, and manufacturing processes are controlled exclusively by lululemon�’s suppliers and are not unique to the company.

Larger firms with established brand names such as Nike, Reebok, and adidas, have gain competitive advantages from their other operations in the broad athletic apparel market. These advantages include longer operating industries, larger and broader customer bases, and a much larger base of suppliers. If these larger firms were to further penetrate lululemon�’s market, they would presumably do so through price competition. The specialty

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retail sector is characterized by a firm�’s ability to segment the market and then develop customer loyalty and a strong brand name. While there are many strategies to pursue this, lululemon enjoys an advantage by through an established brand loyalty. However, a strong brand image can become a double-edged sword. Since lululemon sells their apparel at a premium over traditional athletic apparel, these larger firms would seek to capitalize on their significant networking economies of scale to produce a very similar product at a much lower price. Additionally, larger firms�’ use of traditional advertising sources, such as print and television media, may provide a good way of utilizing their size and resource advantage to quickly siphon away profits from lululemon.

Smaller firms wishing to enter the women�’s premium athletic apparel market may face a tougher time. Since lululemon has already developed distribution channels, raw materials, technology, and favorable locations, a small firm would presumably be competing over brand name and panache. This form of non-price competition in a very small market would be difficult unless the entrant was able to erode the brand name of lululemon. As mentioned above, lululemon competes through a �“grassroots�” marketing campaign designed to increase brand awareness allowing the company to charge a premium for the image it has created. While small-scale entry is still possible, the firm would have to possess significant experienced-based advantages over lululemon to be successful. For example, a Nike designer may convince his/her design team to form a new company to compete with lululemon. Without this additional knowledge and expertise, competing with lululemon directly on brand recognition would not be wise.

Supplier Power

lululemon athletica is not involved in the manufacturing of their products and does not enter into long-term supply contracts. This may be a direct result of lululemon�’s nimble design process; the company may not desire contract use if it wants to be prepared for sudden product line additions. It is important to remember that lululemon�’s brand is based on technologically complex fabrics and manufacturing techniques that severely limit the number of suitable manufactures. This requires that they work directly with third-party suppliers for both fabrics and finished goods. The company works with approximately 35 suppliers, 10 of which provided over

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80% of their products during FY 2009. No single manufacturer produced more than 25% of lululemon�’s products. 75% of the company�’s manufacturing capacity is in China with 8% located in South East Asia.2 The remainder is spread throughout the Americas and Israel. Additionally, the company has strategically positioned some manufacturing capacity near their core North American markets to quickly respond to demand fluctuations and consumer tastes.

One strategy commonly used in the manufacturing industry is to diversify your potential suppliers by giving smaller secondary suppliers just enough business to create a relationship. This may benefit lululemon by preventing supply hold ups if one of their primary manufactures or suppliers experiences difficulties. This strategy may be even more effective for lululemon since they require high ethical and social practices of their manufacturers making the addition of new suppliers costly and time consuming. In contrast to some larger apparel firms, such as Nike, lululemon requires that all suppliers adhere to a strict code of ethics and contracts with an independent workplace inspection and verification team to ensure all standards are met. lululemon will only consider a manufacturer after these standards are met.

lululemon�’s focus on rapid product development has led the firm to adopt a precarious and potentially dangerous supply strategy. Since the firm operates on an order-by-order basis, there is the possibility that the firm may face a significant supply disruption. As the company notes, the social concerns surrounding textile manufacturing in Asia make identifying suitable suppliers an expensive and involved process. Although the specialty apparel market is highly susceptible to shifts in customer taste, it seems that lululemon�‘s desire to remain nimble has directly resulted in their supply situation. For example, Luon fabric, used in many of their products, is only supplied to mills by one manufactuer in Tiawan. Further, a single company supplies the fibers used in the manufacturing of Luon fabric. In essence, lululemon�’s retail and design strategies have resulted in their manufacturers having significant direct power over their revenues.

While there is little chance that lululemon�’s manufactures would integrate forward into the retail product market, there is nothing that prevents them from selling their products directly to lululemon�’s competitors. If this were

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to happen, then the scale economies and other advantages that larger firms have over lululemon may directly lead to their production of apparel based on lululemon�’s designs and fabrics. Furthermore, larger firms may be able to better utilize their production facilities and market the apparel at a lower price.

Buyer Power

Given that lululemon operates in a highly fragmented market space and charges a large premium over traditional athletic apparel manufacturers, their ability to cater to the changing tastes of their target audience is critical. As discussed above, lululemon mainly competes on the brand image and style that other firms lack. As long as lululemon maintains their strong brand image and continues to market to a concentrated segment of the athletic apparel market, buyer power will be limited.

Even though buyers may be able to find substitutes for lululemon�’s products, the targeted consumer would sacrifice the image gained from lululemon�’s apparel. Along the same lines, the company attempts to create a relationship between the store and customer that moves beyond only the apparel. By taking a community-oriented approach with their retail locations and teaming with local fitness instructors and health clubs, lululemon�’s market saturation helps restrict buyer power. Lastly, the buyer does not have bargaining power in their transactions with lululemon. Prices are set at a desired point and left there; the company employs a �“take-it-or-leave-it�” pricing approach. By successfully using market techniques, lululemon has limited buyer power and continually operated above a 45% gross margin.

Substitute and Complement Products

lululemon faces substitute competition from a number of products. As mentioned previously, there is competition from larger traditional athletic apparel firms, smaller specialty firms, and traditional firms that manufacture apparel such as cotton t-shirts and mesh shorts. While the company has gone to great lengths to differentiate its brand, the bottom line is that there are acceptable substitute goods. However, these goods only represent a moderate threat to lululemon�’s profits due to their

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management�’s ability to effectively define and target their market. If lululemon were to offer a discount product to reach a larger segment of the apparel market, substitute goods would pose a much high threat. As the market is presently defined, the lack of numerous comparable goods results in lululemon being insulated from a number of potential substitutes that lack lululemon�’s brand characteristics: form, fashion, and fit.

The number of complement products that exist in market space is small. lululemon has expanded to offer complementary products such as bags, undergarments, and outerwear. In order to address this, lululemon is expanding its brands into the youth market with its label ivivva athletica.

This apparel targets the younger generation through a dance-inspired lens and is designed to capture another target market. By exploiting the relatively large human capital investment in their store �“educators�”, the company also hopes to show past customers that its apparel is versatile enough to be used in other fitness activities such as running and general

fitness. In the specialty retail market, the ability of the firm to differentiate its production as well as continually redefine within the market space is key to the brand�’s success. lululemon athletica�’s core product offerings in technically inspired women�’s yoga apparel will continue to generate the vast majority of its profits for the foreseeable future.

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FINANCIAL ANALYSIS Revenue

Source: Hoovers

lululemon athletica has benefited from tremendous revenue growth since

2004, increasing net revenues from $40.7 million to $711.7 million, average 61% yearly. Fiscal 2010 was no exception to the trend, reporting 57% revenue growth, a strong improvement from 28% in 2009, and 29% in 2008. This strong increase in revenue was the result of two significant improvements in operations. During fiscal 2010, lululemon opened 23 new retail locations, as well as expanded its e-commerce website. Additionally, the success of lululemon�’s strategic plan caused comparable store sales growth of 37%, the highest growth in existing store sales in the last five years.

lululemon reports revenue in three segments, corporate-owned stores, direct to consumer, and other. Corporate-owned stores represent the main business model and strategy of the Company, and generated 83% of 2010 net revenue, down from 87% and 89% in 2009 and 2008 respectively. Direct to consumer sales, generated primarily through the e-commerce website,

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$200.00

$400.00

$600.00

$800.00

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

Year-Ending Revenue

Millions of dollars

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have grown from 1% in 2008 to 8% of 2010 revenues. The �“other�” segment consists of revenues earned through wholesale customers, franchise sales, warehouse sales, and showroom sales, and has remained relatively constant at about 9% of revenues. Despite the quick growth of direct to consumer sales, corporate-owned stores remains the primary growth strategy, with lululemon planning on opening 22-27 new locations in the United States and Canada during 2011.

It is clear that lululemon�’s revenue growth is a result of excellent management and growing brand popularity, as opposed to some general trend in athletic apparel. Revenues have been much more stable for

competitors, specifically down .8% for Nike, up 11% for Adidas, and up 24% for Under Armour (UA). It is reasonable to explain some of this growth by the economic recovery during 2010, which can be seen in the positive effects for Adidas and Under Armour. Given the size of Adidas and Nike, revenue growth comparison is not highly valuable, but the similarities

between Under Armour and lululemon, both in size (Under Armour had revenues of $1.1 billion in 2010) and in business model and product type, highlight the significance of the 57% revenue growth.

Profitability

lululemon has combined its strong revenue growth with significant increases in profitability. Reporting $121 million in net income on $711 million in revenue, the Company has recorded by far its highest profit margin, at 17%, up from 13% in 2009 and 11% in 2008. This increased profitability translated into much higher return for shareholders, with $1.69 net diluted earnings per share, doubling from 2009 and tripling from

2008. Similarly, return on equity has increased from 30% to 39%, and the quality of income remains very strong at 1.48x, although down from a high of 2.02x last year.

lululemon�’s ability to reduce costs in 2010 played a significant role in its increased profitability. After SG&A expenses as a percentage of revenues fell by only .1% in 2010, the Company seems to be benefiting tremendously from production and inventory practices. During 2010, lululemon reduced its cost of goods sold as a percentage of revenues by over 6%, down to 44.5%, the lowest level ever. This move is very encouraging, suggesting that

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the Company is benefiting from economies of scale in production as it has been growing and expanding. It also benefited from decreases in fixed costs, such as occupancy and depreciation, as well as the improvement of the Canadian dollar relative to the U.S. dollar, decreasing foreign exchange impacts.

Within the segments, the corporate-owned stores have the highest profit margin, boasting income before corporate expense of 36.4%, up from 30.9% last year. Direct to consumer, on the other hand, has become less profitable this year, decreasing from 34.4% to 28.5%, while the �“other�” segment improved from 26.3% to 28.4%, but remained the least profitable segment.

Given the relative size of the segments, it is clear that the improved profitability of corporate-owned stores, representing 83% of revenues, also helped drive the increase in profit margins this year.

Source: Hoovers

lululemon continued its strong relative performance compared with competitors, benefiting from much more profitable operations this year than Nike (10% profit margin), Adidas (5%) and Under Armour (6.4%).

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5.00%

10.00%

15.00%

20.00%

Lululemon NIKE adidas Under Armour

Net Prot Margin

Net Prot Margin

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Source: Hoovers

lululemon also offered supreme returns for shareholders, with its 39% return on equity far higher than Nike�’s 20%, UA�’s 14%, and Adidas�’ 22%. However, lululemon did not fare quite as well in comparison with other indicators of profitability, falling behind Nike�’s $3.86 in earnings per share, but surpassing Under Armour ($1.34) and Adidas ($1.38). Finally, lululemon fell third in quality of income, behind Adidas at 2.16x and Nike at 1.66x, although well ahead of UA (.73x).

0.00%

10.00%

20.00%

30.00%

40.00%

Lululemon NIKE adidas Under Armour

Return on Equity

Return on Equity

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SWOT ANALYSIS

Strengths �• Premium high quality products

o High quality materials and innovative designs continue to ensure customer satisfaction

�• Corporate social responsibility

Strengths �• Premium high quality

products �• Corporate social

responsibility �• Strong brand awareness

among fitness athletic and fitness centers

�• Community involvement and charitable giving

�• Brand Equity �• Storefront distribution �• Innovative �• Unique employee culture

Weaknesses �• Perceived female focus �• Low centricity �• Relatively unknown

brand �• Price point �• Limited locations �• Inventory

Opportunities �• Become market expert �• Product diversification �• Line extensions �• Ecommerce �• Expansion to other

countries

Threats �• Fad potential �• Low barriers to entry �• Rapid expansion �• Low brand recognition in

new markets �• Analyst pressure �• Failure of third party

suppliers

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o Commitment to ethical practices has lead to no negative publicity concerning overseas manufacturing

o Commitment to sustainability has already established an eco-friendly brand image

�• Strong brand awareness among fitness athletic and fitness centers o Innovative design process seeks feedback from fitness

professionals �• Community involvement and charitable giving

o Dedicated community coordinators enhance brand awareness throughout the community

�• Brand Equity o Very recognizable brand and logo that has become

synonymous with leading a healthy, fit, and balanced lifestyle o Original focus on women set them apart o Branded stores already in place in community centers

�• Storefront distribution o Established store front distribution channel allows to

products to quickly be taken to market o Customer focused retail experience enhances brand image

�• Innovative o Possess a strong technical aptitude for product performance o Design process can quickly bring new products to market

�• Unique employee culture o Employees, viewed as �“educators�”, receive substantial training

and are urged to remain active and find balance in their lives

Weaknesses �• Perceived feminine focus

o Male customers may be hesitant to purchase products �• Low centricity

o Decentralized management techniques of individual retail stores leads to poor sharing of best practices

�• Relatively unknown brand o Know mostly in large cities and certainly not around the globe

�• Price point

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o Products may seem relatively overpriced when directly compared to competitors

�• Limited locations o Products only sold through private stores and fitness centers

�• Inventory o Costly products means costly inventory

Opportunities �• Become market expert

o By leveraging perceived expertise lululemon can become the leading authority on yoga and fitness apparel

�• Product diversification o Complementary exercise accessories would be easily

distributable through existing channels �• Line extensions

o Building out existing lines can capitalize on customer loyalty o Adapting expertise to other fitness activities and casual

product lines may help customer lifecycle management �• Ecommerce

o More extensive online store may capture new customers and increase brand awareness

�• Expansion to other countries

Threats �• Fad potential

o Brand name and yoga may prove to be fad �• Low barriers to entry

o Absence of exclusive intellectual property rights o Yoga is a popular trend and could breed competition

�• Rapid expansion o Overextension could detract from company mantra

�• Low brand recognition in new markets o Cultural differences could create barriers

�• Analyst pressure o Now that lululemon is a public company they are subjected to

analyst pressures to smooth revenue and growth

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�• Global economic conditions o Inflation could increase overhead costs and consumer tastes

may vary

�• Failure of third party suppliers o Concentrated supply base could lead to inabilities to meet

demand

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PART III RECOMMENDATIONS

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STRATEGIC RECOMMENDATIONS Challenges

Since its humble beginnings, lululemon athletica has established itself as a niche market leader by distributing high quality products through a network of corporate-owned, customer-focused retail locations. They have also built a strong brand image and awareness among fitness professionals through a constant dialogue and design feedback process. Recent success has sent lululemon into a crucial growth phase that will define their future. It is crucial that lululemon maintains their corporate ideals while growing their business. lululemon�’s most valuable asset is the set of customers that they have effectively segmented. In order to successfully grow, lululemon

must continue to expand their product line and customer base, but must take special care to avoid compromising service and alienating current customers. By maintaining brand loyalty, lululemon will help mitigate issues of potential entry into their market. Further, it is imperative that lululemon expands their product line to the point that they can avoid fad

potential. If lululemon can maintain their near-impeccable brand image while expanding, the sky is the limit.

Near-Term Recommendations

Expand Direct to Consumer Distribution

As of Spring 2011, lululemon�’s online retail portion of their website is under construction. They currently offer a few, black-colored only,

selections in the online store but state that the store will be up and running in the upcoming months. Net revenue from lululemon�’s limited e-commerce site increased 214% in 2010 to account for 8% of total net revenues. Management has identified the direct to consumer segment as an important source of growth in the immediate future.

In the short term, it is imperative that lululemon builds an e-commerce site that is at least on par with those of their major competitors. Nike, a top competitor in the athletic apparel market, has an extensive direct to consumer channel by way of its numerous web stores for every type of physical activity. A top-tier online store will allow lululemon to reach a

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much broader customer base and attract affluent customers who may not live near a city center. Increased brand awareness from an online presence will also ultimately drive more foot traffic to lululemon storefronts. E-commerce is also presents opportunities for price discrimination. Possible price discrimination tactics include pricing differently to different geographical regions and offering overstocked items at discounted prices. Lastly, an online presence is also a necessary prerequisite for lululemon�’s eventual expansion into overseas markets.

However, lululemon must be careful to emulate the distinct retail experience inside a brick and mortar store in their e-commerce site. lululemon has always prided itself on the value added by the �“educators�” and community involvement at lululemon stores. An effective strategy must include some type of personalization of the online shopping experience. By urging e-commerce customers to complete a customer profile survey, lululemon can obtain valuable market information and specially cater the online shopping experience. Survey questions would include questions about factors in a customer�’s lifestyle, their level of activity, color preferences, physical sensitivities, etc. The survey could even be accomplished through communicating with an online �“educator�” avatar. Once a customer has created a profile, it is referenced each time the person visits the website and will offer personalized selections and could even have a homepage linked to the community boards of their closest retail location.

Product and Line Expansion

lululemon�’s strong brand image gives them an important opportunity to expand their product offerings and extend their current lines. Originally, lululemon had to rely on the high quality and performance their yoga apparel to fuel their business. Now that they have developed a strong, loyal following, lululemon must engage in customer lifecycle management to capitalize on the non-yoga apparel needs of their customers.

lululemon�’s already-existing men�’s line is an obvious candidate for extension. While building out a men�’s line, lululemon needs to remain aware that their brand conjures a feminine image. It seems likely that the large portion of male lululemon customers that do not practice yoga were referred to the product by females who already have experience with the

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lulu brand name. In order to maximize their potential male customer base, lululemon needs to cater to a broader market segment than yoga-practicing men. Since men may be less likely to adopt lululemon based solely on its style and brand image, lululemon must set themselves apart from their competitors by combining function and form. This gives lululemon the opportunity to leverage their technical innovation and product technology to draw new customers away from products such as Nike�’s basic Dri-FIT workout apparel. lululemon can further segment the male market by catering to less traditional sports such as climbing and martial arts. lululemon must continue to identify markets in which their products�’ form and fit can gain a comparative advantage and effectively re-segment themselves to take advantage of these opportunities.

One of lululemon�’s largest draws to women is that the lululemon brand name has become synonymous with leading a healthy, active, balanced, and fit lifestyle. If a workingwoman is wearing lululemon to the gym each day to exercise, it seems that the next logical step would be for her to wear lululemon outerwear on her way to the gym. Outerwear gives lululemon an incredible opportunity to penetrate another aspect of their customers�’ lives. Outerwear is also usually the most innovative type of apparel and allows lululemon to further leverage their technical knowhow; yet it is important that lululemon does not shy away from their combination of style and function. The technicality of performance outerwear should allow lululemon to market at a relatively high price point and expand their profit margins. Further, outerwear is highly visible and should help to increase overall lululemon brand awareness.

As lululemon is the premier female-oriented athletic apparel brand targeting women around 25-40 years of age, it is rational that lululemon moves into the maternity and babywear segment. Although lululemon currently markets a number of products known to be good apparel choices for pregnant women, a dedicated maternity line may attract females that may not have been as yoga-minded or health-conscious before becoming pregnant. A mentioned above, lululemon already knows that some of their products are perfect choices for maternity wear. If you look at a lululemon community board in a retail location, it is likely that you will find free lululemon-sponsored mom and baby yoga. Recent research has found yoga to have numerous positive applications during the pregnancy and early

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childhood. Further, maternity and baby wear are often given as gifts to expecting mothers and present an opportunity for lululemon to increase their brand awareness through word of mouth. In order to fully capitalize, lululemon needs to gain an early foothold in this potentially very lucrative market.

A product line catering to new mothers is well complemented by offerings for older childern. It appears that lululemon has decided to enter this market through their dance-inspired youth line. Focusing on dance-inspired apparel has allowed lululemon to once again segment a market. Dance class is an age-old physical activity for young girls. By continuing to develop a foothold in the young girl apparel market, lululemon will be well positioned for the growing popularity of yoga-inspired activities for young children. Recent findings have shown the mental aspect of yoga to have benefits well beyond those of low-impact physical strengthing and toning. Yoga can also help children with mental focus and anger management. vi lululemon will be especially well positioned for a growth in the popularity of youth yoga if they are able to establish themselves as the forefront provider of youth yoga apparel.

Long-Term Recommendations

Customer Lifecycle Management

To capitalize on their strong brand image, it is important that lululemon penetrates as many aspects of their customers�’ lives as possible. Obviously, one way to accomplish this is by expanding product offerings into new market segments. By introducing maternity and babywear, outerwear, and casualwear, lululemon can cater to all of the apparel needs of their already-loyal customers. However, there are additional steps that can be taken to increase customer loyalty. Customer loyalty programs can be very effective measures to facilitate repeat buying, especially for goods with relatively high price points. With a customer loyalty program, each time a customer purchases something or possibly refers a friend, they are awarded points that are eventually redeemed for a reward. In keeping with lululemon�’s corporate philosophy, these rewards could include rewards from community partners (e.g. free yoga classes or discount gym memberships), actual lululemon merchandise, or store credit. To further facilitate

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lululemon patronage over a lifetime, the reward program could also include rewards based on lifetime purchases or seniority.

Customer loyal can also be fostered through the creation of an online community. lululemon management views the distinctive lululemon retail experience as a top company strength. Dedicated �“community coordinators�” are responsible for espousing the lululemon mantra through community events and charitable giving. An online lululemon community could easily embody lululemon�’s corporate ideals. For example, online community members would be directed to a customized homepage based on their geographical location. Each of these homepages would correspond with an actual retail location and provide a virtual community board where users could view and discuss community events. In the case that there are no relatively close retail locations, a broader community would be used. Members could also use the community to blog and communicate with lululemon �“educators�”. Member profiles could be combined with e-commerce member profiles for the ultimate customized experience.

Pursue Strategic Partnerships

To effectively compete within the athletic apparel market, lululemon must eventually pursue strategic partnerships comparable to those of Nike and adidas. One of Nike�’s most prolific partnership is with Cupertino, CA based Apple Computers. Nike + iPod enables certain Nike shoes to communicate with a receiver affixed to an iPod or iPhone. The technology allows runners to monitor and record their workouts and subsequently post them to an online community. A strategic partnership with Apple seems to be a good fit for lululemon as well. Both companies are known to release chic, innovative products that appeal to a generally more affluent clientele. lululemon could also look to pursue partnerships with more technical accessory companies such as Polar, a leading manufacturer of heart monitoring equipment. lululemon�’s technical knowledge would surely ensure an innovative combination of any products in a strategic partnership.

Expand into Overseas Markets

In 2006, lululemon established a joint venture in Japan with Descente Ltd. as a means to expand their global presence. However, lululemon management found that the project was taking a disproportionate amount

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of their time and eventually decided to end the agreement in 2008 to focus on their North American operations. Since 2008, lululemon�’s North American operations have exploded making an eventual movement overseas imminent. lululemon management has identified Japan, Australia, and Europe as prime candidates for expansion. When expanding, it is important that lululemon utilizes the distribution channels that joint ventures can offer. lululemon would like to maintain majority ownership of all joint venture projects. With any kind of expansion, it is critical that lululemon is able to maintain their brand equity in new markets. lululemon relies on their brand equity to maintain their high price point so issues could potentially arise in markets where lululemon is not as well-known. To avoid these issues, it is imperative that lululemon�’s healthy and fit mantra is prolific in new markets.

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REFERENCES

i "Lululemon Company History." Lululemon Company Website. Web. 1 Mar. 2011. <http://www.lululemon.com/about/history>.

ii lululemon athletica. (2010). Form 10-K for the fiscal year ended December 31, 2010. Retrieved from http://www.sec.gov/edgar.shtm iii Story, Louise. "�‘Seaweed�’ Clothing Has None, Tests Show." New York Times 14 Nov. 2007. Web. iv Competition Bureau. Industry Canada. Competition Bureau Takes Action to Ensure Unsubstantiated Claims Removed from Lululemon Clothing. Canadian

Competition Bureau. 16 Nov. 2007. Web. <http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/home>. v Canadian Press. "Lululemon Scolded for Linking Clothing Line to Olympics." CBC News. CBC, 16 Dec. 2009. Web. <http://www.cbc.ca/news/story/2009/12/16/consumer-lululemon-olympics.html>. vi Wenig, Marsha. "Yoga for Kids." Yoga Journal. Web. 4 Apr. 2011. <http://www.yogajournal.com/lifestyle/210>.