Lululemon Athletica Strategic and Financial Analysis

Strategic Performance and Brand Recovery

Lululemon Athletica, Inc. was founded in 1998 and is headquartered in Vancouver, Canada. Lululemon Athletica operates under the Textile—Apparel Clothing classification in the United States, and its shares are publicly traded on the Nasdaq under the ticker symbol LULU. The company currently employs approximately 12,500 people and has risen back from a 2013 controversy in which the yoga-wear apparel maker was embroiled in a fashion scandal that threatened to undercut the industry it had virtually launched single-handedly. Lululemon's commitment to athletic gear for women helped it effectively address the issues it faced with its see-through spandex misstep and redirect its resources toward improving its public relations image, strengthening its brand, and supporting sales through an active marketing strategy that helped keep competitors at bay.

Since shares bottomed at $38.47 in 2014, LULU has more than doubled its value for shareholders, indicating that its strategic performance has validated the faith of supporters of the company and confounded those who believed the firm would collapse in the wake of consumer backlash in 2013. Still, Lululemon was never about producing a product that conveyed modesty; instead, the organization embraced the concept of pushing the envelope in women's athletic wear. This was why, in 2014, the company was still engineering leggings "designed to fit close to the body without feeling tight"—clothing made of nylon and lycra to give the wearer "a 'naked' sensation" (Sherman, 2014). Lululemon even offered a variety of sensations for women to choose from: "Relaxed (away from the body), Naked (close to the body but not restrictive), Held-In (a bit tighter), Hugged (even tighter) and Tight (full compression)" (Sherman, 2014)—and the effect was one that kept consumers returning to the brand again and again, even after the fallout from the see-through spandex issue that temporarily cost the company substantially in market capitalization.

The company's strategic performance has only improved since then, in large part thanks to the growing health and yoga-centric movement among men and women across the United States, as well as Lululemon's ability to establish strong appeal among women consumers of athletic apparel. Lululemon's designs have all been based on feedback obtained from "the company's 1,500 ambassadors, testing material efficacy in the lab, and observing customer behaviour in store" (Sherman, 2014). The organization's strategy has therefore been to identify what the customer wants and then deliver exactly that.

Likewise, Lululemon has worked on developing its brand to enhance its image among women, using motivational quotes "emblazoned on bathroom stalls and hallway walls: things like, 'Don't focus on what's missing, focus on what is' and 'Life is like riding a bicycle, in order to keep your balance you must keep moving'" (Sherman, 2014). Lululemon's progression of economic value is driven by the needs of customers at every step, and its ability to stay relevant in a highly competitive industry has been based on its capability of differentiating itself by customizing products that enhance both the image and experience of the female consumer of athletic apparel.

Business Model and Market Positioning

The company's founder, Chip Wilson, had fallen in love with yoga after 20 years working in the active-wear industry (Sherman, 2014; Thompson, 2016). His experience of the yoga-wear market led him to see an opportunity to bring a performance-oriented product for women and men to market. His main marketing tactic was to use word-of-mouth while simultaneously engaging yoga instructors as brand ambassadors—and the technique worked. The company went public in 2007 and achieved net sales of nearly $2 billion in 2014. While the sheer pants scandal of 2013 was a setback, it did not alter Lululemon's business model in the least: the company remained dedicated to designing a product viewed as having spiritual, athletic, and casual appeal for consumers (Sherman, 2014). In other words, the business model was based on a process of differentiation in which the founder identified a gap in the athletic active-wear market that could be filled with yoga-centric, yoga-inspired apparel and marketed it by enlisting the yoga establishment—represented by trendy, young American yoga instructors—to vouch for the brand.

More specifically, the business model reflects the Blue Ocean Strategy of Kim and Mauborgne (2005), which holds that in order for a company to succeed it must think outside the box, identify what competitors are not doing that they should be doing, and then do that. Wilson noticed the oncoming wave of yoga as the next major health trend and rode that wave by creating a business whose sole mission was to cater to consumers within this market. The model has worked well: by 2017, Lululemon operated 406 stores under the Lululemon and Ivivva brands worldwide, including in the United States, Canada, Australia, the United Kingdom, New Zealand, China, Hong Kong, Singapore, South Korea, Germany, Puerto Rico, and Switzerland (Macro Axis, 2018).

Competitive Advantage Through Differentiation

Lululemon Athletica competes with L Brands, Ralph Lauren, Express, American Eagle, and Abercrombie & Fitch. While Lululemon is an athletic apparel company that, along with its subsidiaries, designs, creates, distributes, and sells athletic apparel and accessories for women, men, and female youth, it does so in a manner distinct from its competitors. As Trout and Rivkin (2006) point out, a company must "differentiate or die," and Lululemon has done exactly that from the very beginning by positioning itself as the one authentic yoga-centric brand, with leggings that vary in quality and characteristics so as to appeal to the fullest spectrum of feminine moods, tastes, desires, and expressions.

No other company has attempted to capture the spirit, essence, and character of the yoga-centric market the way Lululemon has. The company has virtually become synonymous with yoga pants and, while it also offers numerous other accessories and apparel types, this niche has defined the company and in essence only made it stronger as the appeal of yoga has grown—not only in the United States but also around the world, fueled by social media sharing of yoga techniques, workouts, and videos, as well as celebrities acting as informal brand ambassadors by wearing yoga gear in their workout content.

Financial Performance Overview

With a P/E ratio of 44.27 and the stock price at all-time highs ($89.12) as of the close on March 29, 2018 (Yahoo! Finance, 2018), LULU had shaken off its 2013 scandal and demonstrated to the market that it remains a leader in the sports clothing industry. Total revenue increased over the preceding three years—from $1.79 billion in 2015 to $2.06 billion in 2016 to $2.34 billion in 2017. Gross profit also increased over this same period—from $914 million in 2015 to nearly $1 billion in 2016 to $1.2 billion in 2017. Total net income continued to grow as well, rising from $239 million in 2015 to $303 million in 2017 (Yahoo! Finance, 2018).

However, the P/E of 44.27 remained well above the Nasdaq average of 25.21, suggesting LULU could be overbought and on the verge of a correction. With equity markets facing the prospect of a significant correction, this represented a reason for investor caution. Like many other public companies, LULU engaged in share buybacks to support its valuation: as Lovelace (2016) reported, Lululemon's "board of directors have approved a stock repurchase program for up to $100 million of its common shares." Macro Axis (2018) reports that Lululemon Athletica is "rated third overall in working capital category among related companies" and is "currently regarded as the number one stock in current ratio category among related companies," with the "ratio of Working Capital to Current Ratio for Lululemon Athletica Inc at about 139,986,842."

Conclusion

Lululemon is an athletic apparel company that has women's fashion and apparel as its core base, but it now sees the opportunity to branch out and grow its brand following a clothing scandal that threatened to undermine the company's image in 2013. Having successfully survived that scandal, the company experienced significant revenue growth and its share price reached record highs as financials continued to improve. By focusing on its retail stores and offering consumers a chance to reconnect with the yoga culture that made Lululemon popular in the first place, the company can provide an experience-driven retail destination that could help secure its position in the market for years to come.

References

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Lovelace, B. (2016). Lululemon's shares jump on earnings outlook boost, stock buyback program. Retrieved from https://www.cnbc.com/2016/12/08/lululemon-shares-jump-on-earnings-outlook-boost-stock-buyback-program.html

Macro Axis. (2018). Lululemon. Retrieved from https://www.macroaxis.com/invest/market/LULU--fundamentals--Lululemon_Athletica_Inc

Sherman, L. (2014). The rise, stumble and future of Lululemon. Retrieved from https://www.businessoffashion.com/articles/intelligence/the-rise-stumble-and-future-of-lululemon

Thompson, A. (2016). Lululemon Athletica, Inc. in 2016: Can the company get back on track? Case 09.

Trout, J. & Rivkin, S. (2006). Differentiate or die. In The marketing gurus (ed. Murray). New York: Penguin.

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