Lululemon Athletica - University of Oregon Investment Group

Key Statistics
52 Week Price Range
50-Day Moving Average
Estimated Beta
Dividend Yield
Market Capitalization
3-Year Revenue CAGR
Trading Statistics
Diluted Shares Outstanding
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Institutional Ownership
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EV/EBITDA
Margins and Ratios
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EBITDA Margin
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Covering Analysts: Ryan
Swift, Ryans@uoregon.edu,
Nitin Agrawal
$41.18 - $77.13
$XX$XX.XX
$73.37
1.60
N/A
$10.07 Billion
41.47%
143.56 million
1.916950 million
105.80%
10.27%
32.12
59.90%
32%
18%
0.00%
0.00x
Ticker: LULU
Current Price: $71.93
Investment Thesis
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Lululemon Athletica
4/17/2012
Consumer Goods
Lululemon is a firm with a unique business model that has experienced
tremendous growth over the past few years and should continue to see
strong revenues for the next few years
Analysts are over estimating the amount of stores to be opened in the
coming years
Recommended a hold due to lack of patents on innovations and, from a
valuation basis, it seems as though the market has factored in a lot of the
growth that the company could experience in the future
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Lululemon Price (5- Year)
Recommendation: Hold
Implied Price: $75.41
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Business Overview
4/17/2012
Lululemon Athletica was founded by Chip Wilson who took a commercial yoga
class in Vancouver and was immediately drawn in to the concept. After
spending many years in the surf, skate, and snowboarding business, Chip found
that the post-yoga rush provided a similar experience to surfing and
snowboarding. It only seemed natural that yoga would become a popular
ideology again. At the time, yoga was performed using cotton clothing and this
seemed inappropriate because it neither removed sweat adequately nor did it
allow for maximum flexibility. Given his passion and expertise in technical
athletic fabrics, he began a movement in yoga clothing where he relied on
feedback from yoga instructors to optimize his apparel.
Lululemon was founded in 1998 to meet these goals. It opened its first store in
November 2000 in Kitsilano, a beach area of Vancouver BC. Beyond getting
feedback from instructors on how to improve the performance of the apparel, the
firm sought to act as a community hub where people can interact and share the
physical and mental aspects of having a healthy lifestyle.
The firm currently has three reportable segments: corporate-owned stores, direct
to consumers, and other.
Corporate-Owned Stores
The corporate-owned stores segment includes all sales to customers through
corporate-owned stores in North America and Australia. In 2011, net revenue
from Lululemon’s corporate-owned stores increased from $591,031,000 to
$817,318,000 representing an increase of $226.3 million or 38%. Additionally,
comparable stores sales saw an increase of 20% or $114.2 million in fiscal
2011when excluding the effects of foreign currency fluctuations. This segment
is by far Lululemon’s largest revenue base. Going forward the segment will
continue to be successful as Lululemon looks to expand its base in 2012 by
opening 30 stores in the United States and 2 ivivva athletica stores in Canada.
Direct To Consumers
The Direct to Consumers segment involves Lululemon’s e-commerce website.
Currently, only 10.62% of revenue comes from the Direct to Consumer segment
while 81.66% comes from the corporate-owned stores; however, the firm
believes this will become an increasingly important segment going forward.
Total revenue for Fiscal 2011 was up $48,965,000 to $106,313,000 representing
a growth rate of 85.38%. As the retail world shifts from brick-and-mortar stores
to online channels, Lululemon’s commitment to increasing its presence in ecommerce
will help the company expand its customer base and improve brand
awareness in new markets, particularly in those outside of the United States.
Other
The Other segment of Lululemon’s business includes a wholesale channel
through which Lululemon sells its products to premium yoga studios, health
clubs, and fitness centers. Aside from wholesale, “Other” also includes franchise
sales, wholesale accounts, sales from company-operated showrooms, and
warehouse sales and outlets. Sales in this segment rose in the fiscal year of 2011
from $63,325,000 to $77,208,000 representing a growth of 7.71% year over
year. The wholesale channel is meant to provide greater, more convenient access
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to Lululemon’s products for its customers and it also believes that by targeting
premium outlets, it can improve the brand image.
While previously franchise sales were part of the "Other" category, the company
reported that it will no longer partake in the business and that it had reacquired
its four remaining franchise stores during fiscal 2011. Lululemon used to enter
into franchise agreements to distribute its products and to more quickly
disseminate its brand name in exchange for one-time franchising fees and
ongoing royalties based on gross revenue. Going forward, this segment should
grow by opening new showroom locations and increasing its list of wholesale
partners.
Strategic Positioning
Grassroots Marketing
A key to Lululemon’s success in the retailing world is based on their community
marketing approach. Lululemon seeks to differentiate its brand through a
community-based approach of building brand awareness and customer loyalty
by employing social media and in-store community boards. All of Lululemon’s
stores offer free yoga and fitness classes to local communities. The company
dedicates a significant amount of time to understanding the market it is entering
and then tailoring the experience appropriately. The classes are led by
Lululemon ambassadors who embody the Lululemon brand by training and
teaching exclusively in Lululemon gear. In exchange they receive 15% off of
merchandise.
Many of Lululemon’s competitors seek to promote their brands through
traditional forms of advertisement such as print media, television commercials,
and celebrity endorsements. This often increases sales in new markets more
rapidly. Lululemon, however, seeks to build extreme brand loyalty through its
inclusive community with hopes the overall experience is what will drive its
consumer-base going forward.
Vertical Retailing Strategy
Lululemon is sold exclusively through the firm’s own stores, high-end lifestyle
centers and yoga studios. Its stores are primarily placed in urban shopping
districts and malls that cater toward the high-income, trendy crowds. Unlike
larger athletic companies such as Nike that sell their products to large
department stores, Lululemon has stayed true to its boutique approach which has
helped them achieve higher profit margins and cemented its position in
consumers’ minds as an elite performance company.
Lululemon believes that the experience it creates with consumers is central to its
strategy. Its sales associates, who are referred to as “educators”, seek to develop
a personal connection with each customer and undergo 30 hours of in-house
training. The vertical retailing strategy also allows stores to retain control over
its operations to ensure that this experience is provided. Further, vertical
retailing allows Lululemon to reduce response time and provide new products to
the market within a month.
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Business Growth Strategies
4/17/2012
Although Lululemon has experienced dramatic growth in the past few years, it
will look to expand further by increasing the number of domestic and
international stores, creating new technologies, and increasing the range of its
athletic activities and target markets.
Domestic and International Expansion
As of January 29 2012, Lululemon owned 155 stores in North America (47 in
Canada and 108 in the United States). According to management, it expects the
majority of near-term store growth to occur in the United States. Management
has forecasted that North America has capacity for 350 stores. It hopes to open
thirty more stores in the United States along with two Ivivva Athletica stores (a
youth brand that creates technical apparel for dancers, gymnasts, ice skaters,
etc.) in Canada.
In order to broaden the appeal of their Products Lululemon will be branching out
from yoga apparel. During Q1 2012 Lululemon will be launching swimming and
surfing apparel and in the future, road biking, commuting, cold weather, spin
and outerwear lines.
In addition to expanding within the United States, Lululemon has also hinted at
stepping up its international expansion plans. The company already operates
stores in New Zealand and Australia and is expected to open approximately five
stores in fiscal 2012 in these markets. Lululemon also opened a London
showroom in mid-April and is expected to open a second Hong Kong showroom
by the end of May. If the firm is successful in marketing its products within
these countries, it will serve as a huge catalyst for growth in the future.
Lululemon’s management has also expressed interest in forming joint-ventures
with other Asian countries, which will further its revenues as well.
Industry
Overview
Women’s Apparel
Lululemon chiefly operates in the Women’s Apparel market, which is a large,
mature, and fragmented market that is extremely sensitive to economic trends.
The main activities of this industry include selling maternity wear, skirts and
dresses, pants, jeans and shirts. Sports apparel, the niche that Lululemon
currently occupies, also falls under this category. Revenue has declined at an
annual rate of 1.1% from 2006 to 2011, which has taken a toll on the profits of
retailers. In spite of the challenging business cycle, the industry expended the
number of stores at an average rate of 0.9% per year in 2011. Additionally,
IBISworld predicts that revenue will grow at an average annual rate of 3.4% to a
total market size of $47.9 billion in 2016. While the growth in revenue will
initially be slow due to macroeconomic uncertainty and high unemployment,
consumer confidence and disposable income is projected to rise, which will be a
major catalyst for firms operating within this industry.
Firms within the Women’s Apparel market are also sensitive to changes in the
price of cotton, an important raw input. In 2008, as the price of cotton and other
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commodities surged, the bottom-line of many retailers took a large hit. Although
producers are typically able to pass off some of the rise in commodity costs to
consumers, weakening demand and lower disposable incomes made it difficult
to increase prices. As a way of coping with this environment, retailers tried to
cut costs in other ways by cutting the wages of workers or laying off employees
and replacing many of their jobs with automated technology. As a result, the
number of workers employed in the Women’s Apparel industry has decreased at
an average annual rate of 1.7% till 2011. (Information taken from IBISworld).
Lululemon is not as sensitive to these fluctuations as the majority of its raw
materials are petroleum based.
Gym, Health, and Fitness Clubs in the US
Although Lululemon is not itself a gym, fitness centers act as a complementary
industry to the company and thus positive trends in this industry act as a positive
sign for Lululemon. This industry has benefited from consumer trends fighting
against obesity and improving health and wellness. As a result, gym
memberships have increased during the past 10 years from 36.3 million in 2002
to an estimated 43.6 million in 2012. The introduction of women-oriented gyms
has also increased the customer base by encouraging more women to partake in
fitness.
There is an element of seasonality for industry participants where the greatest
growth in gym memberships occurs during the first three months of the year. On
average, 30% of new members join during this period due to New Year’s
resolutions. In spite of favorable consumer trends, the gym industry is not
recession-proof. During the financial crisis, consumers halted gym memberships
and membership numbers began to decline for the first time in years. However,
the increase in leisure time helped protect membership sales. Gym, health, and
fitness clubs are also expected to benefit from the increased interest from youth
and baby boomers, which will contribute to the average annual industry growth
rate of 2.8% to $29 billion in 2017.
Macro factors
The macro factors that will be central to Lululemon’s success include per capita
disposable income, time spent on leisure and sports, as well as consumer
sentiment.
Per Capita Disposable Income
Per Capita disposable income, which measures a person’s ability to purchase
goods or services, is computed by taking total income, subtracting taxes,
savings, and non-tax payments, and dividing by the total population. According
to IBISworld, the estimated value in 2012 is $32,953 with a forecasted value of
$36,845, representing a compound growth rate of 2.3% for the next five years.
From 2007-2012, the compound average growth rate was 0.1%. After the
financial crisis, credit tightened and unemployment increased from 4.6% to
10.6% in the time period between 2007 and 2010. Wages failed to increase
during the crisis and the savings rate rose from 1.4% in 2005 to 4.9% in 2009,
decreasing the funds available for purchasing goods.
Conditions began to stabilize in 2010 as corporate profits began to increase,
which not only aided investor stock portfolios, but also removed pressure on
businesses to depress wages. Therefore, while disposable income growth
dropped by 3.2% in 2009; it grew 0.9% in 2010. Challenges still remain as a
depressed housing market, high unemployment, and rising prices continue to
stunt growth in disposable income. Additionally, if the United States continues
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to run a fiscal deficit, higher tax rates may be necessary in order to balance the
deficit which would have a negative impact on discretionary income.
Time Spent on Leisure and Sports
Time spent on leisure and sports includes time spent socializing and
communicating, watching television, browsing the internet, playing games,
reading, playing sports, exercising as well as time spent traveling to and from
these activities. The estimated value of this metric was 5.20 hours per day in
2011 and it experienced a compound annual growth rate of 0.43% from 2006-
2011. On average, Americans spend approximately 2 hours and 45 minutes
watching TV, 45 minutes socializing, and 20 minutes on sports, exercise or
recreation. These numbers are typically driven by changes in the unemployment
rate, since Americans who are employed have less time for leisure than those
who do not.
IBISworld forecasts time spent on leisure and sports to decrease to 5.08 hours
per day in 2016 representing a compound annual growth rate of -0.47%. This is
driven by an uptick in employment due to a recovering economy.
Because Lululemon more specifically operates in the athletic apparel industry, it
is also worth looking at participation in sports, which has an estimated value of
18.6% in 2012 and a forecasted value of 19.2% in 2017. This represents a
growth of 0.6% versus the 0.13% from 2007 to 2012. Participation in sports is
also driven by unemployment and while this may reduce the participation rate
for working individuals, the aging population will retire and push growth
upward. There are two other favorable trends that may help Lululemon’s target
demographic. The first is that the public appears to be moving away from
participation in team sports and more toward individualized fitness activities,
which has increased the number of gym memberships issued during the past five
years. Additionally, there is a rise in alternative fitness techniques. Participation
rates in activities such as yoga, tai chi, and pilates should increase due this trend.
Consumer Sentiment
Consumer sentiment is measured using a survey conducted by the University of
Michigan. In the survey, participants are asked to comment on household
finances, business conditions, unemployment, inflation, among other items. The
CSI took a hit with the dot com bubble and plunged further in 2008 after the
collapse of Bear Stearns and Lehman Brothers. It remained low through 2009,
but as housing prices stabilized and corporations regained profitability has
slowly improved.
IBIS world’s expected value in 2012 is 67.7, which represents a compound
annual growth rate of -4.59% from 2007 to 2012, but it is expected to increase to
70.8 in 2017 indicating a modest compound growth rate of 0.92%. Due to the
magnitude of the crisis, total economic recovery will take place slowly. By 2017
the CSI will be well below the 2007 average of 85.6.
Competition
Despite occupying a unique niche within the athletic apparel industry,
Lululemon has recently gained competitors in recent years. Traditionally, big
companies such as Nike, Adidas, and Under Armour have dominated the athletic
apparel industry and these firms continue to have an impact on the markets
today. These firms are large with market caps upward of $5 Billion and try to
distinguish themselves amongst competitors by securing endorsements by high-
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Gross Margin 2008 2009 2010 2011
Under Armour 48.9% 48.2% 49.9% 48.2%
Nike 45.0% 44.6% 46.2% 45.1%
Gap 36.1% 37.5% 40.3% 40.4%
Lululemon 53.3% 50.7% 49.3% 55.5%
4/17/2012
profile athletes, creative marketing campaigns, and creating innovative
technologies. With the exception of a commitment to creating innovative
products in apparel, these initiatives are in contrast to Lululemons. In order to
market its products, Lululemon completely shuns away from print or media
advertising and instead focuses on selecting ambassadors within carefully
selected markets. As a result, it’s possible for Lululemon’s competitors to
achieve and maintain brand awareness and market share more quickly. These
firms are more diversified in terms of the products they produce. Some of their
competitors manufacture footwear and sporting goods. Furthermore, Lululemon
is targeted towards women and focused on yoga and running activities. It also is
only beginning its international expansion. Under Armour, Nike, and Adidas are
targeted towards men and women of all ages, are diversified amongst virtually
all sports and, with the exception of Under Armour, are well on their way to
international markets.
Aside from the big name athletic apparel manufacturers, other competitors such
as Gap’s Athleta brand, Lucy Activewear Inc. and Bebe Stores’ BEBE SPORT
collection have emerged as competitors to Lululemon. Athleta was introduced as
its own separate brand of Gap Inc. in 2009 and offers women’s yoga clothing,
swimwear, running clothing, as well as athletic apparel for fitness, golf and
tennis to women at a lower price point than Lululemon. BEBE SPORT and Lucy
Activewear also manufacture similar products aimed at women and are roughly
priced within the same price category. Although these brands were recently
introduced and do not seem to have impacted Lululemon’s revenues, as
familiarity with these products gains, Lululemon could be forced to sell their
products at a lower price thus reducing margins. Finally, it should be noted that
Lululemon does not own any patents or exclusive intellectual property rights to
the technology, fabrics, or processes that underlie its products. This makes it
easier for current and future competitors to manufacture and sell products with
similar performance capabilities and styling.
Management and Employee Relations
CEO: Christine Day
Christine Day is the Chief Executive Officer and Director of Lululemon
Athletica Inc. She previously served as the Executive Vice President of retail
operations from January 2008 through April 2008 and was appointed as Chief
Operating Officer in April 2008. Prior to Lululemon, she worked at Starbucks
Corporation where she was the President of the Asia Pacific Group from July
2004 through February 2007 and as the Co-president for Starbucks Coffee
International from July 2003 to October 2003. She earned her BA in
Administrative Management from Central Washington University and is a
graduate of Harvard Business School’s Advanced Management Program.
According to Reuters, her total compensation is $3,472,890 and also has stock
options with an estimated market value of $3,837,570.
CFO: John Currie
John Currie is the Chief Financial officer and Executive Vice President of
Lululemon Athletica since January 2007. Before working for Lululemon, he
worked for Intrawest Corporation from 1996 to 2006 and was the CFO from
2004 to 2006 as well as Senior Vice President of Financing and Taxation from
1997 to 2004. He is a chartered accountant and received his Bachelor of
Commerce degree from the University of British Columbia. According to
Reuters, his basic compensation was $1,105,580 and has stock options with an
estimated market value of $7,819,560.
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Recent News
4/17/2012
April 17th, 2012 – Lululemon Ducks the Radar and Lands in
London (CNBC.com)
This article covers Lululemon’s ventures into London and how it is expected to
open a showroom there. Other key facts covered are that the company ranks
fourth in sales per square foot in retail ($2004 behind Apple, Tiffany, and
Coach) and achieved same-store sales growth of 20% the previous year.
Furthermore, it also discusses Lululemon’s grassroots initiatives as opposed to
traditional print advertising and how with strong sales in the United States,
international expansion could be the icing on the cake for the company.
2/2/2012 Lululemon CEO: Wilson Knew it was Time to Go
(Forbes.com)
This article discusses the resignation of Lululemon’s CEO from the company
two years ago. Chief Product officer Sheree Waterson has taken over as
Wilson’s replacement. Wilson, will be best known for his controversial
marketing campaign where he placed the phrase, “who is John Galt” on
Lululemon’s tote bags, which were not well-received products by consumers,
but created a buzz that Wilson really enjoyed. Since his departure, Lululemon
has not seemed to struggle and instead the author argued that the former CEO
mostly realized that he was not CEO-material and that the company would be
left in better hands upon his resignation.
Catalysts
Upside
Increased interest and demand for alternative fitness activities such as
yoga
Uptick in the economy will allow for more disposable income and thus
more money to spend on Lululemon’s products
New initiatives for men will broaden product offerings and improve
brand awareness if successful
Potential for international expansion
Downside
Lofty growth expectations could lead to down turns in stock prices if it
does not meet expectations
Potential for substitute products at a lower cost is an especially big risk
because they do not own patents on their products
Comparable Analysis
When evaluating comparable firms, the chief metrics used in selection were
revenue growth rates as well as margins. Lululemon has high forecasted growth
rates and is earning strong margins relative to its peers. This is what sets the firm
apart from its competitors. Choosing a firm with lower growth rates and or low
margins would artificially depress the multiple and thus makes the comparables
analysis less accurate in determining a fair price for Lululemon. In addition to
these metrics, the overall business model was into consideration when choosing
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companies to use for the comparables. Of the companies chosen (Under
Armour, Deckers, Tiffany and Company, and Coach Inc.), Under Armour and
Deckers were given a slightly higher weighting than the other two due to the fact
that the companies were more similar to Lululemon in terms of actual revenues,
EBIT, EBITDA, and also having similar growth rates while being in the same
general industry as Lululemon. Tiffany is mostly into the retailing of jewelry,
which is not the same industry as Lululemon, and Coach is simply bigger than
all of the comparables, which means that it is not as comparable in terms of
market cap or market size in general.
Under Armour – 40% Weight
“Under Armour, Inc. engages in the design, development, marketing, and
distribution of apparel, footwear, and accessories for men, women, and youth
worldwide. The company offers its apparel in three fit types: compression,
fitted, and loose that are designed to be worn in hot, cold, and changing
temperatures. Its footwear products include football, baseball, lacrosse, softball
and soccer cleats, as well as slides, performance training footwear, running
footwear, basketball footwear, and hunting boots for athletes. The company’s
accessories comprise baseball batting, football, golf, and running gloves; and
licensees offer socks, team uniforms, baby and kids’ apparel, eyewear, and
custom-molded mouth guards, as well as hats and bags. Under Armour, Inc.
sells its products primarily under the UA and UNDER ARMOUR brands
through wholesale channels, which include independent and specialty retailers,
institutional athletic departments, leagues and teams, national and regional
sporting goods chains, and department store chains; independent distributors;
and directly to consumers through its own specialty and factory house stores,
and Website. The company was founded in 1996 and is headquartered in
Baltimore, Maryland.”
Deckers Outdoor Corporation – 20% Weight
“Deckers Outdoor Corporation engages in the design, manufacture, and
marketing of footwear and accessories for outdoor activities and casual lifestyle
use for men, women, and children. The company offers luxury footwear,
handbags, apparel, and cold weather accessories under the UGG brand name;
open and closed-toe outdoor lifestyle footwear, multi-sport shoes, light hiking
shoes, amphibious footwear, and rugged outdoor travel shoes under the Teva
brand name; action sport footwear under the Sanuk brand name; high-end casual
footwear for men and women under the TSUBO brand name; outdoor
performance and lifestyle footwear under the Ahnu brand name; and work
footwear under the MOZO brand name. The company sells its products
primarily to specialty retailers, department stores, outdoor retailers, sporting
goods retailers, shoe stores, and online retailers. Deckers Outdoor Corporation
also sells its products directly to end-user consumers through its Websites, call
centers, retail concept stores, and retail outlet stores, as well as through retailers
in the United States. In addition, the company distributes its products through
independent distributors and retailers in Europe, Canada, Australia, Asia, and
Latin America. It has a joint venture with Stella International Holdings Limited
for the opening of retail stores and wholesale distribution for the UGG brand in
China. Deckers Outdoor Corporation was founded in 1973 and is headquartered
in Goleta, California. “
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Tiffany & Co. – 20% Weight
4/17/2012
“Tiffany & Co., through its subsidiaries, engages in the design, manufacture,
and retail of fine jewelry worldwide. Its jewelry products include fine and
solitaire jewelry; diamond engagement rings and wedding bands to brides and
grooms; and non-gemstone, sterling silver, gold, and platinum jewelry. The
company also provides timepieces, sterling silver goods, china, crystal,
stationery, fragrances, personal accessories, and leather goods. Tiffany & Co.
sells its products through retail sales, Internet and catalog sales, business-tobusiness
sales, and wholesale distribution primarily in the Americas, the Asia-
Pacific, Japan, and Europe. The company also sells its products through its
stores, as well as through department store in Japan. As of January 31, 2012, it
operated 247 stores, including 102 in the Americas, 58 in Asia-Pacific, 55 in
Japan, and 32 in Europe. The company was founded in 1837 and is
headquartered in New York, New York.”
Coach Inc. – 20% Weight
“Coach, Inc. designs and markets accessories and gifts for women and men in
the United States and internationally. It primarily offers handbags, women’s and
men’s bag, accessories, business cases, footwear, wearables, jewelry, sunwear,
travel bags, watches, and fragrance products. The company’s accessories,
include money pieces, wristlets, cosmetic cases, wallets, card cases, time
management and electronic accessories, key rings, charms, and women’s and
men’s belts; business cases, such as computer bags, messenger-style bags, and
totes; wearables comprise jackets, sweaters, gloves, hats, and scarves; jewelry
consisting of bangle bracelets, necklaces, rings, and earrings; and luggage and
related accessories, such as travel kits and valet trays. It provides women’s
fragrance collections, including eau de perfume spray, eau de toilette spray,
purse spray, body lotion, and body splashes. The company operates stores in
North America, Japan, Hong Kong, Macau, and mainland China, as well as sells
through the Internet and the Coach catalog. It also sells its products to wholesale
customers and distributors in approximately 20 countries. As of July 2, 2011, it
had 345 retail and 143 factory leased stores located in North America; 169
Coach-operated department store shop-in-shops, retail stores, and factory stores
in Japan; and 66 Coach-operated department store shop-in-shops, retail stores,
and factory stores in Hong Kong, Macau, and mainland China. The company
was founded in 1941 and is headquartered in New York, New York.” (Company
descriptions taken from Yahoo Finance)
Other Considerations
Aside from the aforementioned firms, other companies that were considered for
the comparables analysis included Nike, Whole Foods Markets, Saks, Bebe, and
Liz Claiborne. Nike was considered because it has also begun targeting women
through its Nike Women campaign and has created similar products (Dri-Fit
Training Capris) while also operating in the same industry as Lululemon.
However, because the company is not growing as rapidly and has lower
margins, it is trading at a lower multiple and would not be appropriate to include
in the analysis.
Whole Foods Markets was considered because it can be considered a play on the
alternative lifestyle market, and thus could be an indicator of the potential
growth within this segment of the population that Lululemon is trying to target.
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Company EV/EBITDA
Under Armour 25.71
TIFFANY 10.39
DECKERS 30.90
COACH 13.95
Lululemon 26.14
Average 21.42
4/17/2012
However, because it operates in the retail of food, it’s EBIT and EBITDA
margins as well as its growth rates were not comparable.
Finally, Saks, Liz Clairborne, and Bebe were considered because they are
higher-end brands that are often frequented by women, and, in the case of Bebe,
an indirect competitor to Lululemon through particular product lines. However,
these firms simply did not have the requisite growth and margins needed to be
truly comparable to Lululemon.
Discounted Cash Flow Analysis
COGS
Cost of goods sold was also projected using a “cost per square foot” metric and
was initially increased in the first two years, but brought back down slightly due
to economies of scale in the long run.
Beta
For computing the betas, the Vasicek 5 year monthly and 1 year weekly betas
were calculated along with the Hamada 5 year monthly and 1 year weekly betas.
The Vasicek was used in order to adjust for variances within the industry, which
are important in an industry like retail where companies can have a wide variety
of expected returns and volatility levels. The Hamada beta was used to compare
Lululemons beta to the equity beta of its competitors as it adjusts for capital
structure.
Revenue Model
In order to construct the revenue model, the total number of stores, was
estimated using historical data and management guidance. From there, the total
square footage can also be computed once the average store size was figured
out. For the projection years, it was assumed that the store size would not
increase because Lululemon’s small store size is actually vital to its commitment
to providing an overall shopping experience for its consumers. Sales per square
foot were assumed to increase due to managements comments that existing
stores have excess capacity for future growth.
Exit Multiple
For an exit multiple we used EV/EBITDA as it is most commonly used. In order
to calculate the exit multiple we took an average of the trailing twelve months
EV/EBITDA for Lululemon and the companies used in the comparables
analysis. We obtained a multiple of 21.42x EBITDA.
Recommendation
Lululemon is growing rapidly and has a unique business model that will help it
see solid increases in revenues for the next few years. However, based on our
discounted cash flow and comparables analysis there does not appear to be a
significant undervaluation. Therefore, LULU is a HOLD for all portfolios.
UOIG 11

University of Oregon Investment Group
Appendix 1 – Comparables Analysis
4/17/2012
Comparables Analysis Analysis Ticker UA TIF DECK COH
($ in millions) LULU Under Armour TIFFANY DECKERS COACH
Stock Characteristics Max Min Weight Avg. Median 40.00% 20.00% 20.00% 20.00%
Current Price $96.21 $67.56 $80.03 $70.10 $71.95 $96.21 $68.26 $67.56 $71.93
50 Day Moving Average $95.82 $66.05 $80.52 $72.46 $73.40 $95.82 $68.69 $66.05 $76.22
200 Day Moving Average $86.66 $60.24 $77.89 $75.80 $60.24 $83.25 $68.34 $86.66 $67.96
Beta $1.85 $0.77 $1.46 $1.58 1.60 1.50 1.85 0.77 1.66
Size
Short-Term Debt 173.80 0.00 37.67 3.84 0.00 6.88 173.80 0.00 0.80
Long-Term Debt 538.40 0.00 185.76 103.40 0.00 183.61 538.40 0.00 23.20
Cash and Cash Equivalent 1,085.60 175.38 428.43 352.90 409.44 175.38 442.20 263.61 1,085.60
Non-Controlling Interest 5.49 0.00 1.10 0.00 4.81 0.00 0.00 5.49 0.00
Preferred Stock 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Diluted Basic Shares 296.09 52.81 136.77 141.06 113.31 52.81 128.42 153.69 296.09
Market Capitalization 21,048.91 5,070.39 10,052.94 9,537.51 8,119.21 5,070.39 8,691.48 10,383.54 21,048.91
Enterprise Value 19,987.31 5,085.49 9,849.04 9,543.45 7,714.58 5,085.49 8,961.48 10,125.42 19,987.31
Profitability Margins
Gross Margin 72.3% 48.4% 55.5% 54.2% 56.9% 48.4% 59.0% 49.3% 72.3%
EBIT Margin 30.9% 10.9% 18.6% 20.1% 28.7% 10.9% 19.4% 20.7% 30.9%
EBITDA Margin 33.7% 13.4% 21.3% 23.1% 31.7% 13.4% 23.5% 22.8% 33.7%
Net Margin 21.2% 6.6% 12.2% 13.4% 18.5% 6.6% 12.1% 14.7% 21.2%
Credit Metrics
Interest Expense $48.57 $0.00 $11.30 $2.05 $0.00 $3.84 $48.57 $0.25 $0.00
Debt/EV 0.08 0.00 0.03 0.02 0.00 0.04 0.08 0.00 0.00
Leverage Ratio 0.97 0.00 0.56 0.42 0.00 0.97 0.83 0.00 0.02
Interest Coverage Ratio 1262.28 0.00 276.49 34.44 0 51.29 17.59 1262.28 0
Operating Results
Revenue $4,481.39 $1,000.84 $2,489.40 $2,557.81 $1,000.84 $1,472.68 $3,642.94 $1,377.28 $4,481.39
Gross Profit 3,242.06 569.27 1,499.58 1,432.00 569.27 712.84 2,151.15 679.00 3,242.06
EBIT 1,382.76 160.70 539.59 496.88 286.96 160.70 708.43 285.33 1,382.76
EBITDA 1,509.47 197.00 614.43 584.33 317.22 197.00 854.36 314.31 1,509.47
Net Income 950.97 96.92 357.17 320.52 184.96 96.92 439.19 201.86 950.97
Valuation
EV/Revenue 7.71x 2.46x 4.24x 3.96x 7.71x 3.45x 2.46x 7.35x 4.46x
EV/Gross Profit 14.91x 4.17x 7.90x 6.65x 13.55x 7.13x 4.17x 14.91x 6.17x
EV/EBIT 35.49x 12.65x 25.18x 23.05x 26.88x 31.65x 12.65x 35.49x 14.45x
EV/EBITDA 32.21x 10.49x 21.51x 19.53x 24.32x 25.81x 10.49x 32.21x 13.24x
EV/Net Income 52.47x 20.40x 39.31x 35.59x 41.71x 52.47x 20.40x 50.16x 21.02x
Multiple Weight
EV/Revenue 40.98 20.00%
EV/Gross Profit 43.27 0.00%
EV/EBIT 67.33 40.00%
EV/EBITDA 63.80 40.00%
EV/Net Income 67.73 0.00%
Price Target 60.65
Current Price 72.1
Overvalued 18.88%
UOIG 12

University of Oregon Investment Group
Appendix 2 – Discounted Cash Flows Analysis
Discounted Cash Flow Analysis
4/17/2012
($ in millions) 2007A 2008A 2009A 2010A 2011A 2012E 2013E 2014E 2015E 2016E
Total Revenue 269.94 353.49 452.90 711.70 1000.84 1370.91 1699.20 2081.37 2334.69 2546.93
% YoY Growth - 30.95% 28.12% 57.14% 40.63% 36.98% 23.95% 22.49% 12.17% 9.09%
Cost of Goods Sold 116.72 158.60 208.98 292.14 401.31 433.20 599.85 760.60 851.47 923.27
% Revenue 43.24% 44.87% 46.14% 41.05% 40.10% 31.60% 35.30% 36.54% 36.47% 36.25%
Gross Profit $153.22 $194.89 $243.92 $419.56 $599.53 $937.71 $1,099.35 $1,320.77 $1,483.22 $1,623.67
Gross Margin 56.76% 55.13% 53.86% 58.95% 59.90% 68.40% 64.70% 63.46% 63.53% 63.75%
Selling General and Administrative Expense 93.38 118.10 136.16 212.78 282.31 383.85 475.78 582.78 653.71 713.14
% Revenue 34.59% 33.41% 30.06% 29.90% 28.21% 28.00% 28.00% 28.00% 28.00% 28.00%
Depreciation and Amortization 8.29 15.82 20.83 24.61 30.26 43.67 57.22 70.90 82.70 83.00
% Revenue 3.07% 4.48% 4.60% 3.46% 3.02% 3.19% 3.37% 3.41% 3.54% 3.26%
Provision for Impairment and Lease Exit Costs 0.00 4.41 0.38 1.72 0.00 7.18 8.90 10.90 12.23 13.34
% Revenue 0.00% 1.25% 0.08% 0.24% 0.52% 0.52% 0.52% 0.52% 0.52% 0.52%
Earnings Before Interest & Taxes $51.55 $56.56 $86.55 $180.441 $286.96 $503.00 $557.45 $656.18 $734.57 $814.18
% Revenue 19.10% 16.00% 19.11% 25.35% 28.67% 36.69% 32.81% 31.53% 31.46% 31.97%
Other Income (expense) 1.03 0.82 0.16 2.89 2.50 3.58 5.10 6.66 7.94 8.66
% Revenue .38% .23% .04% .41% .25% .26% .30% .32% .34% .34%
Earnings Before Taxes 52.58 57.39 86.71 183.33 289.46 499.42 552.35 649.52 726.64 805.52
% Revenue 19.48% 16.23% 19.15% 25.76% 28.92% 36.43% 32.51% 31.21% 31.12% 31.63%
Less Taxes (Benefits) 20.46 16.88 28.43 61.08 104.49 182.29 198.85 233.83 261.59 289.99
Tax Rate 38.92% 29.42% 32.79% 33.32% 36.10% 36.50% 36.00% 36.00% 36.00% 36.00%
Net Income From Continuing Operations 32.12 40.50 58.28 122.25 184.96 317.13 353.51 415.69 465.05 515.54
% Revenue 11.90% 11.46% 12.87% 17.18% 18.48% 23.13% 20.80% 19.97% 19.92% 20.24%
Net Income Attributable To Non-Controlling Interest 0.00 0.00 0.00 0.35 0.90 1.37 1.70 2.08 2.33 2.55
% Revenue 0.00% 0.00% 0.00% .05% .09% .10% .10% .10% .10% .10%
Net Loss from Discontued Operations ($1.27) ($1.14) -
% Revenue (.47%) (.32%) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Net Income $30.84 $39.36 $58.28 $121.897 $184.06 $317.13 $353.51 $415.69 $465.05 $515.54
Net Margin 11.43% 11.14% 12.87% 17.13% 18.39% 23.13% 20.80% 19.97% 19.92% 20.24%
Add Back: Depreciation and Amortization 8.29 15.82 20.83 24.61 30.26 43.67 57.22 70.90 82.70 83.00
Add Back: Interest Expense*(1-Tax Rate) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Operating Cash Flow $39.13 $55.19 $79.11 $146.51 $214.32 $360.80 $410.73 $486.60 $547.75 $598.54
% Revenue 14.50% 15.61% 17.47% 20.59% 21.41% 26.32% 24.17% 23.38% 23.46% 23.50%
Current Assets 99.82 121.10 220.94 395.69 535.45 679.57 778.63 768.46 761.70 809.40
% Revenue 36.98% 34.26% 48.78% 55.60% 53.50% 49.57% 45.82% 36.92% 32.63% 31.78%
Current Liabilities 36.14 45.34 58.68 85.36 103.44 154.50 193.54 239.77 271.88 296.97
% Revenue 13.39% 12.83% 12.96% 11.99% 10.34% 11.27% 11.39% 11.52% 11.65% 11.66%
Net Working Capital $63.68 $75.76 $162.26 $310.32 $432.01 $525.07 $585.09 $528.69 $489.82 $512.43
% Revenue 23.59% 21.43% 35.83% 43.60% 43.16% 38.30% 34.43% 25.40% 20.98% 20.12%
Change in Working Capital 12.09 86.50 148.06 121.69 93.06 60.02 -56.41 -38.86 22.60
Capital Expenditures 30.01 42.80 15.50 43.90 122.31 74.00 78.00 91.20 92.07 98.58
% Revenue 11.12% 12.11% 3.42% 6.17% 12.22% 5.40% 4.59% 4.38% 3.94% 3.87%
Acquisitions 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
% Revenue 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Unlevered Free Cash Flow 9.12 0.30 (22.88) (45.45) (29.68) 193.74 272.71 451.80 494.54 477.35
Discounted Free Cash Flow 170.75 211.81 309.26 298.33 253.78
EBITDA 59.8 72.4 107.4 205.1 317.2 546.7 614.7 727.1 817.3 897.2
EBITDA Margin 22.17% 20.48% 23.71% 28.81% 31.70% 39.88% 36.17% 34.93% 35.01% 35.23%
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UOIG 13
-

University of Oregon Investment Group
Appendix 3 – Revenue Model
4/17/2012
Total Stores 2007A 2008A 2009A 2010A 2011A 2012E 2013E 2014E 2015E 2016E
Canada 37 42 44 44 47 55 63 72 79 85
Change in # 5 2 0 3 8 8 9 7 6
% Growth 13.51% 4.76% 0.00% 6.82% 17.02% 14.55% 14.29% 9.72% 7.59%
United States 30 61 66 78 108 138 168 198 223 243
Change in # 31 5 12 30 30 30 30 25 20
% Growth 103.33% 8.20% 18.18% 38.46% 27.78% 21.74% 17.86% 12.63% 8.97%
Australia 0 0 0 11 18 21 23 24 25 26
Change in # 0 0 11 7 3 2 1 1 1
% Growth - - - 63.64% 16.67% 9.52% 4.35% 4.17% 4.00%
New Zealand 0 0 0 0 1 2 3 5 6 6
Change in # 0 0 0 1 2 1 2 1 0
% Growth - - - - 100.00% 50.00% 66.67% 20.00% 0.00%
Japan 4 0 0 0 0 0 0 0 0 0
Change in # -4 0 0 0 0 0 0 0 0
% Growth -100.00% - - - - - - - -
Hong Kong 0 0 0 0 0 1 2 3 3 3
Change in # 0.00% 0.00% 0.00% 0.00% 100.00% 100.00% 100.00% 0.00% 0.00%
% Growth - - - - - 100.00% 50.00% 0.00% 0.00%
Other International 0 0 0 0 0 0 1 2 5 9
Change in # 0.00 0.00 0.00 0.00 0.00 1.00 1.00 3.00 4.00
% Growth - - - - - - - - -
Total 71 103 110 133 174 217 260 304 341 372
Estimating Total Revenue 2007A 2008A 2009A 2010A 2011A 2012E 2013E 2014E 2015E 2016E
Sales Per Square Foot 1700 1450 1318 1726 2004 2030 2100 2200 2200 2200
% Growth -14.71% -9.10% 30.96% 16.11% 1.30% 3.45% 4.76% 0.00% 0.00%
Total Square Footage 161,595.88 243,784.83 343,625.19 412,342.99 541,504.41 675,324.46 809,144.52 946,076.67 1,061,224.15 1,157,697.48
Average Store Size 2276.00 2366.84 3123.87 3100.32 3112.09 3112.09 3112.09 3112.09 3112.09 3112.09
Total Revenue 274,713,000.00 353,488,000.00 452,898,000.00 711,704,000.00 1,000,839,000.00 1,370,908,658.02 1,699,203,485.23 2,081,368,664.70 2,334,693,140.33 2,546,934,456.00
UOIG 14

University of Oregon Investment Group
Appendix 4 – Working Capital Model
Working Capital Model
4/17/2012
($ in millions) 2007A 2008A 2009A 2010A 2011A 2012E 2013E 2014E 2015E 2016E
Total Revenue $274.71 $353.49 $452.90 $711.70 $1,000.84 $1,370.91 $1,699.20 $2,081.37 $2,334.69 $2,546.93
Current Assets
Cash & Cash Equivalents 52.54 56.80 159.57 316.29 409.44 494.50 528.00 462.50 418.50 435.00
% of Revenue 19.13% 16.07% 35.23% 44.44% 40.91% 36.07% 31.07% 22.22% 17.93% 17.08%
Cash per store opened 1.64 8.11 6.94 7.71 9.52 11.50 12.00 12.50 13.50 14.50
Accounts Receivable 4.30 4.03 8.24 9.12 5.20 9.60 16.99 20.81 23.35 25.47
% of Revenue 1.57% 1.14% 1.82% 1.28% 0.52% 0.70% 1.00% 1.00% 1.00% 1.00%
Inventory 37.93 52.05 44.07 57.47 104.10 150.80 203.90 249.76 280.16 305.63
Days Inventory Outstanding 118.61 120.12 76.97 71.80 94.94 127.06 124.07 119.86 120.43 120.83
% of Revenue 13.81% 14.72% 9.73% 8.07% 10.40% 11.00% 12.00% 12.00% 12.00% 12.00%
Prepaid Expenses 2.52 4.11 4.53 6.41 8.36 13.71 16.99 20.81 23.35 25.47
% of Revenue 0.92% 1.16% 1.00% 0.90% 0.83% 1.00% 1.00% 1.00% 1.00% 1.00%
Assets of Discontinued Operations 2.52 4.11 4.53 6.41 8.36 10.97 12.74 14.57 16.34 17.83
% of Revenue 0.92% 1.16% 1.00% 0.90% 0.83% 0.80% 0.75% 0.70% 0.70% 0.70%
Total Current Assets 99.816775 121.099 220.939 395.687 535.45 679.5726688 778.6325141 768.4611937 761.6998916 809.399365
% of Revenue
Long Term Assets
36.33% 34.26% 48.78% 55.60% 53.50% 49.57% 45.82% 36.92% 32.63% 31.78%
Net PP&E Beginning 18.18 43.60 61.66 61.59 70.95 163.01 280.68 301.45 321.75 331.12
Capital Expenditures 30.013 41.045 15.497 30.357 122.311 74 78 91.2 92.07 98.58
Cap Ex per Store $ 0.42 $ 0.40 $ 0.14 $ 0.23 $ 0.36 $ 0.20 $ 0.30 $ 0.30 $ 0.27 $ 0.27
Depreciation and Amortization 8.29 15.82 20.83 24.61 30.26 43.67 57.22 70.90 82.70 83.00
Net PP&E Ending 43.6 61.7 61.6 71.0 163.01 280.68 301.45 321.75 331.12 346.70
Total Current Assets & Net PP&E 143.42 182.76 282.53 466.64 698.46 960.25 1080.09 1090.21 1092.82 1156.10
% of Revenue
Current Liabilities
15.87% 17.44% 13.60% 9.97% 16.29% 20.47% 17.74% 15.46% 14.18% 13.61%
Accounts Payable 5.40 5.27 11.03 6.66 14.54 20.56 25.83 32.26 36.77 40.50
% of Revenue 1.96% 1.49% 2.43% 0.94% 1.45% 1.50% 1.52% 1.55% 1.58% 1.59%
Accrued Charges 15.23 27.97 27.83 42.14 57.41 $78.14 $98.55 $122.80 $140.08 $152.82
% of Revenue 5.55% 7.91% 6.15% 5.92% 5.74% 5.70% 5.80% 5.90% 6.00% 6.00%
Income Taxes Payable 5.72 2.13 7.74 18.40 8.72 21.52 26.68 32.68 36.65 39.99
% of Revenue 2.08% 0.60% 1.71% 2.59% 0.87% 1.57% 1.57% 1.57% 1.57% 1.57%
Unredeemed Gift Card Liability 8.11 9.28 11.70 18.17 22.77 34.27 42.48 52.03 58.37 63.67
% of Revenue 2.95% 2.62% 2.58% 2.55% 2.28% 2.50% 2.50% 2.50% 2.50% 2.50%
Other Current Liabilities 0.78 0.69 0.38 -
-
-
-
-
-
-
% of Revenue 0.28% 0.20% 0.08% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Liabilities of Discontinued Operations 0.90 -
-
-
-
-
-
-
-
-
% of Revenue 0.33% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Total Current Liabilities 36.14 45.34 58.68 85.36 103.44 154.50 193.54 239.77 271.88 296.97
% of Revenue 13.16% 12.83% 12.96% 11.99% 10.34% 11.27% 11.39% 11.52% 11.65% 11.66%
UOIG 15

University of Oregon Investment Group
Appendix 5 – Discounted Cash Flows Analysis Assumptions
Discounted Free Cash Flow Assumptions
Tax Rate 36.50%
Risk Free Rate 2.00%
Beta 1.64
Market Risk Premium 7.00%
% Equity 100.00%
% Debt 0.00%
Cost of Debt 0.00%
CAPM 13.47%
WACC 13.47%
Terminal Value 2,497
PV of Terminal Value 1,327
Total Debt 0
Cash & Cash Equivalents 409
Market Capitalization 8,152
Fully Diluted Shares 113
Vasicek 5 Year Monthly 2.13
Vasicek 1 Year Weekly 1.54
Hamada 5 Year Monthly 1.29
Hamada 1 Year Weekly 1.60
LULU Beta 1.6383676
Beta SD Weighting
25.00%
25.00%
25.00%
25.00%
Exit Multiple Calculation
Terminal Year EBITDA 897.18
Exit Multiple 21.22
Terminal Value 19034.47
Discount Period 5
Discount Factor 1.880953
Discounted Terminal Value 10119.59
Present Value of FCF 1243.93
Enterprise Value 7714.58
Outstanding Shares 113.31
Implied Price 79.06355
Current Price 72.03
Implied Price Weight
Comps 60.19 30%
DCF 81.93 70%
Target Price 75.41
Current Price 72.03
Undervalued 4.70%
4/17/2012
Company EV/EBITDA
Under Armour 25.81
TIFFANY 10.49
DECKERS 32.21
COACH 13.24
Lululemon 24.32
Average 21.22
UOIG 16

University of Oregon Investment Group
Appendix 6 –COGS Model
Appendix 7 – Sources
SEC Filings
Company Investor Relations page
Company presentations
Earnings call
IBIS World
Factset
4/17/2012
Estimating COGS 2007A 2008A 2009A 2010A 2011A 2012E 2013E 2014E 2015E 2016E
Cost Per Square Foot 722.32 650.57 608.16 708.50 800.00 888.24 940.00 900.00 870.00 850.00
Total COGS 116,723,746 158,598,050 208,980,000 292,143,000 433,203,526 599,851,507 760,595,846 851,468,999 923,265,015 984,042,858
UOIG 17