COMPANY OVERVIEW Lululemon athletica inc. (Lululemon or 'the company') is a designer and retailer of technical athletic apparel. The company offers a wide range of apparel and accessories, including pants, shorts, tops and jackets designed for healthy lifestyle activities such as yoga, running, and general fitness. The company markets its products under lululemon athletica and ivivva athletica brands through self-operated stores and e-commerce portals, lululemon.com and ivivva.com. lululemon primarily operates in North America and Australia. It also operates and manages distribution facilities and warehouses in the US, Canada, and Australia. Lululemon is headquartered in Vancouver, British Columbia, Canada. The company reported revenues of (US Dollars) US$2,649.2 million for the fiscal year ended January 2018 (FY2018), an increase of 13% over FY2017. In FY2018, the company's operating margin was 17.2%, compared to an operating margin of 18% in FY2017. In FY2018, the company recorded a net margin of 9.8%, compared to a net margin of 12.9% in FY2017. KEY FACTS Head Office lululemon athletica inc. 1818 Cornwall Ave Vancouver British Columbia Vancouver British Columbia CAN Phone 1 604 7326124 Fax 1 604 8746124 Web Address shop.lululemon.com Revenue / turnover (USD Mn) 2,649.2 Financial Year End January Employees 13,400 NASDAQ Ticker LULUSWOT ANALYSIS lululemon athletica inc. (lululemon) is a designer and retailer of technical athletic apparel. Multi-channel approach, improved liquidity position, and enhancing the product line are its key strengths, whereas dependence on third-party suppliers and manufacturers is an area of concern. In the future, rising labor wages in the US and Canada, intense competition and influx of counterfeit products could affect the company's growth. However, positive outlook for global e-retail market and increase in consumer spending in the US could provide growth opportunities for the company. Strength Weakness Multi-channel approach Dependence on third-party suppliers and Enhancing the product line manufacturers Liquidity position Opportunity Threat Positive outlook for global e-retail market Huge influx of counterfeit products Increase in consumer spending in the US Intense competition Rising labor wages in the US and Canada Strength Multi-channel approach The company offers its products through company-operated retail stores, showrooms, and e-commerce websites. At the end of FY2018, the company operated 270 stores in the US, 57 in Canada, 28 in Australia, six in New Zealand, nine in the UK, 158 in China and Singapore, three in South Korea and two each in Germany, Switzerland and Ireland. Most of these stores are operated under the lululemon athletica brand name. The company also operates 55 of its corporate-owned stores under ivivva athletica brand name, specializing in athletic apparel for female youth. The company-operated retail stores are located primarily on street locations, in lifestyle centers and in malls. The company also sells its products through e-commerce websites, including www.lululemon.com, www.ivivva.com and other country and region specific websites. lululemon also sells lululemon athletica products through wholesale channel, including premium yoga studios, health clubs and fitness centers. These locations offer an alternative distribution channel that is convenient for its core consumers. The company also offers its products through warehouse sales and outlets. Therefore, the multi-channel approach increases lululemon's reach and enables it to cater to a wide customer base. This, in turn, helps lululemon to enhance its market presence. Enhancing the product line lululemon develops its products by using various technologies and fabrics. The company uses waterprooftechnology to produce water resistant apparel. This technology combines a waterproof fabric and a waterproof construction. A waterproof fabric has a membrane that resists water 'om going inside, while a waterproof construction taps and seals every seam to resist water om going inside. lululemon uses Silveresoent fabric technology, which is powered by XSTATIC that is designed to provide permanent odor protection by naturally stopping the growth of bacteria on the surface of fabrics. The company uses spacer constmction in its soft and sketchy cotton blends to create uniquely tailored silhouettes. It also uses various fabrics to manufacture its products. For instance, Luon fabric withstands severe stretch and sweat. Evonatural fabrics are soft and comfortable along with technical performance. Evonatural fabrics include Tech Teny, Tech Pima, Qwick Oxford and Qwick Chino. Swift fabric is strong and light as well as offers ease of movement and setch. Luxtreme is a smooth, four-way setch fabric and offers support during intense sweat. Naturally breathable fabrics are made with natural bers and yams for extra soness. Natural blends include Boolux, Cotton Fleece, Pima cotton, Stretch French Teny, Tencel and Vitasea. Mesh and liners are lightweight stretchy and absorbs sweat. These include Mesh fabric and Coolmax fabric. Nulu fabric, a naked sensation innovation. Therefore, the company's focus on enhancing its product line through various technologies and fabrics will enable it to address a large potential customer base and also cater to the varied preferences of its customers. Liquidity position The company's liquidity improved in FY2018. Improved liquidity is an indication of the increasing ease in funding the company's day to day operations, which also improves its ability to capture growth opportunities in the market. The compaan current ratio was 4.9 at the end of FY2018. The company's current ratio was higher than that of its major competitors, adidas AG and bebe stores, inc., which reported a cunent ratio of 1.4 and 0.8 during the same period. The increase in cunent ratio could be due to increase in total cunent assets, which increased by 23.5% orn US$1,152.7 million in FY2017 to US$1 ,436.3 million in FY2018, due to decrease in accounts payable and accrued expenses. Weakness Dependence on thirdparty suppliers and manufacturers lulule mon depends on thirdparty suppliers and manufacturers to provide fabrics and to produce its products, and therefore, has little oonol over the quality of products. In FY2018, approximately 64% of the company's products were produced by its top ve manufacturing suppliers and 35% of raw materials were produced by a single manufacturer. During the same period, neariy 53% of lululemon's products were produced in South East Asia, about 25% in South Asia, approximately 10% in China, approximately 8% in the Americas. lululemon obtains substantially all of its Luon fabric, which represents nearly 30% of the fabric the company uses in its products, from four suppliers. The company has no longterm contracts with its suppliers or manufacturers. Therefore, any failure on the part of manufacturers to achieve and maintain high manufacturing standards could result in manufacturing enors resulting in product recalls or withdrawals, delays or interruptions in production, cost overruns or other problems that could seriously harm the company's business. The compaan reliance on third party suppliers makes it difcult to ensure the quality of the goods sold in its outlets, and may lead to product recalls. This, in turn, could have an adverse effect on customer retention and brand loyalty. Opportunity Positive outlook for global eretail market The company stands to benet from growing online retailing, which provides consumers the convenience of shopping from home. With the increase in interactive methods and limitless content, the retail e commerce is growing at a faster rate. Economic stability in maiolity of the countries is also fueling the market. Further, changing lifestyles due to rising income levels, rising intemet penetration, userfliendly interface of web portals, enhanced discounts and offers, changing consumer patterns and purchasing power are expected to be the major growth drivers for the market in the coming years. The company took several initiatives to enhance its ecommerce operations. Its ecommerce portals offer diverse range of products in various competitive prices which enhance the shopping experiences of its customers and also enable the company to in crease the portal visits of these sites. ad id as merchandises these products through various ecommerce portals including adidas.com and Reebokcom in approximately 40 countries woridwide. According to inhouse research report, the global eretail sales was valued at US$773,992.6 million and is expected to grow at a CAGR of 15.2% dudng 201520 to reach a value of US$1 568,249.13 million by the end of 2020. In terms of geography, AsiaPacic accounted for 35.1% of total sales in 2015, followed by the US (33.5%), Europe (27.2%), Middle East (0.5%) and Rest of the Wodd (3.7%). Increase in consumer spending in the US The company could benet from the increase in consumer spending in the US. Growing personal income, disposable personal income and personal consumption expenditure indicate improved consumer spending in the US, which could increase the purchase of its products and its performance. According to the US. Bureau of Economic Analysis (BEA), in April 2018, the personal income (Pl) in the US increased by 0.3% or US$495 billion, disposable personal income (DPI) increased by 0.3% or US$609 billion and the personal consumption expenditure increased by 0.6% reaching US$79.13 billion from the previous month. In April 2018, the real DPI increased by 0.2% and real personal consumption expenditures PCE increased by 0.4% from previous month. Threat Huge inux of counterfeit products The market for counterfeit goods has been on the rise across industries and is affecting the sales and image of the established brands. Its performance will be affected by the increasing inux of counterfeited products in the market. According to Organisation for Economic Cooperation and Development, imports of counterfeit and pirated goods are valued approximately half a trillion dollars a year which accounts 2.5% of global imports, with US, Italian and French brands have the hardest hit and many of the proceeds going to organized crime. By 2026, the counterfeited products market is estimated to exceed US$2 billion. The im'rtated goods are eating into the market share of the branded products through their low price offerings. Since customers end up buying counterfeit products which look similar to branded labels, the low quality of these counterfeits affects consumer condence and tamishes the brand image of the genuine company. lululemon athletica inc. Page 6 Q MarketLine lsiwgfginggsasthletica inc. WE Intense competition The market for technical athletic apparel is higth competitive. The competition in the athletic apparel industry is based on brand image and recognition, product quality, innovation, style, distribution and price. lululemon competes with wholesalers and direct sellers of athletic apparel, including Nike, adidas and Under Mom. The company also competes with retailers specically focused on women's athletic apparel including The Gap (including the Athleta brand}, Lucy Activewear {a brand of V.F. Corporation), and bebe stores (including the BEBE SPORT collection). In addition, lululemon faces plice wars from Target and WatMart Stores, which sell products at lower prices. For instance, Target and WatMart stores sell yoga pants. Increasing competition could lead to pricing pressures, which, in turn, could reduce the company's prots. Rising labor wages in the US and Canada Increasing manpower costs could have an adverse effect on the company's margins. It implemented several initiatives to expand its presence, which requires increasing its employee base. However, increasing manpower costs could impact its stabil'rty and operational efciency. The light labor markets, government mandated increases in minimum wages and a higher proportion of fulltime employees could result in an increase in labor costs. The federal minimum wage provisions are contained in the Fair Labor Standards Act (FLSA). As of January 2018, the minimum wage rate in the US was US$75 per hour. The minimum wage rate in 29 states and the District of Columbia is more than the federal rate. These wages range om US$11 in Massachusetts, US$8.25 in Florida, US$8.25 per hour in Illinois, US$9.25 per hour in Michigan, US$9.25 per hour in Maryland, US$1U.1 per hour in Hawaii and Connecticut and US$105 in California. The minimum wage in the District of Columbia reached US$125 per hour