Lululemon Business Model Case Study

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Lululemon Athletica, Inc. Company & Financial Analysis w/ Recommendations

Part 1

Strategic Performance

Lululemon Athletica, Inc. was founded in 1998 and is headquartered in Vancouver, Canada. Lululemon Athletica operates under the Textile—Apparel Clothing classification in the U.S. and its shares are publicly traded on the Nasdaq under the ticker symbol LULU. The company currently employs approximately 12500 people and has risen back from a 2013 controversy in which the yoga-wear apparel maker was embroiled in a fashion faux pas that threatened to undercut the industry it virtually launched single-handedly. Lululemon’s commitment to athletic gear for women helped it to effectively address the issues it faced with its see-through spandex slip-up and redirect its resources to 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 roiled those who thought the firm would crash to zero 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 terms of women’s athletic wear, which 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 coming back to the brand again and again, even after the fallout from the see-through spandex issue that temporarily cost the company substantially in terms of market cap.

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 all across the U.S. as well as Lululemon’s ability to establish a 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). Thus, the organization’s strategy has been to identify what the customer wants and then to give that exactly to them.

Likewise, Lululemon has worked on developing its own 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 the need of customers at every step of the way 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

The company’s founder, Chip Wilson, had fallen in love with yoga after 20 years working in the active-wear industries (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 the market. His main marketing tactic was to use word-of-mouth while simultaneously engaging yoga instructors as his 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 the business model of Lululemon in the least: the company was dedicated to designing a product that was 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 company’s founder looked into the athletic, active-wear markets, saw a gap that he could fill with yoga-centric, yoga-inspired apparel, and market it by essentially getting the yoga Establishment (represented by trendy, young American yoga instructors) to vouch for the brand (Sherman, 2014).

In other words, the business model was based on the Blue Ocean Strategy of Kim and Mauborgne (2005), which explained that in order for a company to succeed all it had to do was to think outside the box, see what competitors were not doing that they should be doing, and then do that. Wilson noticed the oncoming wave of yoga as the next big health trend and rode the wave by creating a business whose sole mission was to cater to the consumers within this market.

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The model has indeed worked well: By 2017, Lululemon operated 406 stores under the Lululemon and Ivivva brands all over the world: 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

Lululemon Athletica competes with L Brands, Ralph Lauren, Express, American Eagle, and Abercrombie Fit. 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 way that is different from its competitors. As Trout and Rivkin (2006) point out, a company must “differentiate or die” and Lululemon has done just that from the very beginning by labeling itself as the one and only authentic yoga-centric brand, with leggings that range 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 that 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, which has in essence only made it stronger as the appeal of yoga has grown not only in the U.S. but also around the world thanks to social media sharing of yoga techniques, yoga workouts, yoga videos, and celebrities virtually acting as brand ambassadors by wearing the yoga gear in their workout videos.

Financial Performance

With a current P/E ratio of 44.27 and the stock price at all-time highs ($89.12) as of close on March 29th, 2018 (Yahoo! Finance, 2018), LULU has shaken off its 2013 scandal and shown that market that it is still a leader in the sports clothing for women industry. Total revenue has increased over the last three years—from 1.79 billion in 2015 to 2.06 billion in 2016 to 2.34 billion in 2017. Gross profit has 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 revenue also continues to grow, up from 239 million in 2015 to 303 million in 2017 (Yahoo! Finance, 2018). However, the P/E of 44.27 is still well above the Nasdaq average, which is at 25.21, meaning LULU could be overbought and be on the verge of a correction. With equities currently facing the prospect of entering into a major correction, this could be one reason that investors take pause. Still, like so many other public companies, LULU has engaged in share buybacks to support its current valuation: as Lovelace (2016) has reported, Lululemon’s “board of directors have approved a stock repurchase program for up to $100 million of its common shares.” With the company’s financials doing well, supporting the stock through buybacks may seem counterintuitive and will be addressed in Part 2 of this paper.

Macro Axis (2018) reports that Lululemon Athletica, Inc. is “rated third overall in working capital category among related companies” and that the Canadian company 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.”

SWOT

Strengths

The company’s strengths are its ability to tap into a niche market before anyone else and establish itself as the leader in that market, acting as the cultural ambassador in a sense of the yoga experience. It has also found great appeal among women who want a range of leggings and other athletic apparel that can express their feelings. The company’s brand is one of its main strong suits and its ability to develop brand loyalty among young women consumers means that it will likely have lifelong consumers who buy from Lululemon all their athletic and yoga gear wear.
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