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Group7Lululemon
- 1. Company Valuation Helena Bilbrey AzharGulaid Carissa Kasim Caroline Shoemaker Peihan Zhao
- 2. Unique Value Proposition • Underlyinggrowth in key drivers (healthy lifestyle & fashion trends) • Untapped potential in the Asian-Pacific markets • Lululemon provides a unique in-store experience • Strongly positioned with focus on fashion appeal and high athletic performance quality • Strong historical financial performance • Expansion into global market can boost finances • Revenue segment momentum supports revenue growth Financial Growth Strong Market Potential We value Lululemon Athletica inc. at $75 per share, nearly 4% above market price 2
- 3. Strong Market Potential UniqueValue Proposition Financial Growth Valuation 3
- 4. Market Potential ŸUnique Value Proposition Ÿ Financial Growth Ÿ Valuation! 4 Lululemon has the least market share in the athletic apparel industry 55% 34% 7% 4% Source: Company 10-K Reports Market Share
- 5. Market Potential ŸUnique Value Proposition Ÿ Financial Growth Ÿ Valuation! Healthy living and casualization of apparel are the drivers of growth in the athleisure market Healthy living 5 Growth in Athleisure Market Casualiza3on of apparel
- 6. Market Potential ŸUnique Value Proposition Ÿ Financial Growth Ÿ Valuation! Athletic apparel has become more “casualized” and worn for uses other than exercising Use of Apparel Casual 38% Running/Walking 37% Gym Exercise 25% 6 Source: The Mintel Report
- 7. Market Potential ŸUnique Value Proposition Ÿ Financial Growth Ÿ Valuation! 5 8 9 11 12 15 17 21 24 23 25 26 27 29 30 32 - 5 10 15 20 25 30 35 2014 2015 2016F 2017F 2018F 2019F 2020F 2021F Population Practicing Yoga in the United States (2012-2021F) Millions of People CAGR (2012-21F) Male Female Frequency of Yoga (50+/year) 5.3% 8.9% 18.3% Population practicing yoga growing at 12% 7 Source: Sport Business Research Network
- 8. Strong Market Potential UniqueValue Proposition Financial Growth Valuation 8
- 9. High Athletic Performance Market PotentialŸ Unique Value Proposition Ÿ Financial Growth Ÿ Valuation! Athletic Apparel Market Mapping (2016) Athletic Performance and fashion appeal High Athletic Performance High Fashion Appeal Lululemon has set itself apart from competitors by way of unique fashion appeal Low Fashion Appeal Low Athletic Performance 9
- 10. High Athletic Performance Market PotentialŸ Unique Value Proposition Ÿ Financial Growth Ÿ Valuation! Athletic Apparel Market Mapping (2016) Athletic Performance and fashion appeal High Athletic Performance High Fashion Appeal Competitors encroaching Lululemon’s niche market space Low Fashion Appeal Low Athletic Performance 10
- 11. Market Potential ŸUnique Value Proposition Ÿ Financial Growth Ÿ Valuation! NuluTMSilverscent® Mesh & LinerLuon® Lululemon incorporates quality, functionality, and technical superiority 11
- 12. Market Potential ŸUnique Value Proposition Ÿ Financial Growth Ÿ Valuation! 12 Despite its high quality standards, Lululemon manages to keep costs low 52% 54% 52% 64% 30% 32% 38% 0% 82% 86% 90% Lululemon Nike Under Armour Gap COGS % of Sales SG&A % of Sales Total Source: Morningstar
- 13. Market Potential ŸUnique Value Proposition Ÿ Financial Growth Ÿ Valuation! 13 Lululemon is able to charge higher prices than competitors $98 $80 $75
- 14. Market Potential ŸUnique Value Proposition Ÿ Financial Growth Ÿ Valuation! Help me help myself Ambassadors Community Manifesto Lifestyle management is a key aspect that sets Lululemon apart from competitors 14
- 15. Strong Market Potential UniqueValue Proposition Financial Growth Valuation 15
- 16. Market Potential ŸUnique Value Proposition Ÿ Financial Growth Ÿ Valuation! 16 Lululemon’s current financial position Revenue $ 2060.5 M Gross Margin 48.4 % Operating Income $ 369.1 M Operating Margin 17.9 % Net Income $ 266 M LULU (as of January 2016)
- 17. Market Potential ŸUnique Value Proposition Ÿ Financial Growth Ÿ Valuation! 17 Lululemon’s operating margin currently outperforms competitors 17.9 14.0 9.9 8.7 0 5 10 15 20 Lululemon Nike Under Armour GAP Lululemon’s Operating Margin Compared to Main Competitors (2016) Operating Margin, % Source: Morningstar
- 18. Market Potential ŸUnique Value Proposition Ÿ Financial Growth Ÿ Valuation! Established profitability provides a strong foundation for growth 18 Product Innovation Full North American Potential Digital Culture Global Footprint • Look to ambassadors as a source of inspiration • Men: pioneered with ABC pants and Sweat category • Women: Swift technology gaining momentum, more color options for tops • Optimizing existing store square footage • Expanding brand presence through different formats • New website: more interactive customer experience • Mobile App • Promote brand awareness in Asian countries • Focused on winning in London • Opening new stores in Europe, Middle East and Asia
- 19. Market Potential ŸUnique Value Proposition Ÿ Financial Growth Ÿ Valuation! 19 4.3% growth in sales of sportswear in China presents an untapped opportunity Sale of Sportswear in China Billions of U.S. Dollars Source: Euromonitor International 139.2 134.7 148.3 165.0 172.2 179.6 187.4 195.6 204.1 212.9 222.1 0 50 100 150 200 250 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
- 20. Market Potential ŸUnique Value Proposition Ÿ Financial Growth Ÿ Valuation! Expansion into the Asian market is not risk-free 20 Fluctuating foreign exchange rate Intellectual property Cost of raw materials Maintaining value and reputation Supply chain problems Barriers in the global market
- 21. Market Potential ŸUnique Value Proposition Ÿ Financial Growth Ÿ Valuation! 21 Lululemon’s investment in e-commerce segment leads to forecasted growth 74% 59% 19% 32% 7% 9% 2015 2016F 2017F 2018F 2019F 2020F 2021F 2022F Percent Revenue by Segment (2015-2022F) Other Direct to Consumers Company- operated Stores
- 22. Market Potential ŸUnique Value Proposition Ÿ Financial Growth Ÿ Valuation! Lululemon Financial Performance (2015 – 2022F) Millions of U.S. Dollars 22 Despite decrease in revenue growth over time, still expected CAGR of ~10% - 0.05 0.10 0.15 - 1,000 2,000 3,000 4,000 2015 2016F 2017F 2018F 2019F 2020F 2021F 2022F Growth Rate Revenue Growth Rate
- 23. Strong Market Potential UniqueValue Proposition Financial Growth Valuation 23
- 24. Market Growth ŸUnique Value Proposition Ÿ Financial Growth Ÿ Valuation! 24 Year 2015 2016F 2017F 2018F 2019F 2020F 2021F 2022F Revenue 2.06 2.32 2.61 2.93 3.24 3.52 3.75 4.00 COGS 1.06 1.09 1.23 1.38 1.53 1.66 1.76 1.88 SG&A 0.63 0.67 0.76 0.85 0.94 1.02 1.09 1.16 Depreciation 0.07 0.09 0.10 0.12 0.13 0.14 0.15 0.16 EBIT 0.30 0.47 0.52 0.59 0.65 0.70 0.75 0.80 EBIT (1-t) 0.21 0.33 0.37 0.41 0.45 0.49 0.52 0.56 CAPX 0.14 0.16 0.18 0.20 0.22 0.24 0.25 0.27 ΔNWC 0.07 0.06 0.06 0.07 0.08 0.09 0.09 0.10 FCF 0.07 0.20 0.22 0.25 0.28 0.30 0.32 0.34 Free cash flows (in billions of U.S. dollars)
- 25. Market Growth ŸUnique Value Proposition Ÿ Financial Growth Ÿ Valuation! Lululemon’s equity value is $9.54B, suggesting an appropriate price per share of ~$75 • Risk free rate: 2.75% • Beta: 0.67 • WACC: 6.10% • Terminal growth rate: 3% • Terminal forecast year: 2022 • Tax rate: 30% $4.0B 2022 revenue Financial Assumptions Key Results $0.79B 2022 EBIT $9.54B Equity Value $75 Price per share 25
- 26. Unique Value Proposition • Underlyinggrowth in key drivers (healthy lifestyle & fashion trends) • Untapped potential in the Asian-Pacific markets • Lululemon provides a unique in-store experience • Strongly positioned with focus on fashion appeal and high athletic performance quality • Strong historical financial performance • Expansion into global market can boost finances • Revenue segment momentum supports revenue growth Financial Growth Strong Market Potential We value Lululemon Athletica inc. at $75 per share, nearly 4% above market price 26
- 27. Appendix! 27 Appendix: Index (28)SWOT Analysis – Strength and Weakness (29) SWOT Analysis – Opportunities and Threats (30) Marketing Strategy (31) Marketing Strategy (32) Marketing Strategy (33) WACC Comparables (34) Discounted Cash Flow Analysis (35) Historical Stock Prices (36) Growth in Asian markets (37) Store Locations (worldwide)
- 28. Appendix! 28 SWOT ANALYSIS Strengthsand Weaknesses • Unique brand positioning and fashionable product offering • Multi-channel approach • Strong revenue growth • Dependence on third-party suppliers and manufacturers • High price • Unable to properly predict demand for products
- 29. Appendix! 29 SWOT ANALYSIS Opportunitiesand Threats • Compelling long term growth opportunity • Men’s sales growth, ivivva store roll-outs, and larger store formats • Rising popularity of e-commerce • Increasing competition in athletic apparel sector • FX volatility impacting sales and margins
- 30. Appendix! Marketing Strategy Segmentation Positioning Targeting • Athleticupper-class women • Athletic upper-class men • Younger population • Athletic upper-class women and men in their 20’s – 40’s • Higher price • Higher quality 30
- 31. Appendix! Marketing Strategy: 4P’s Product Price Place Promotion • Athletic apparel • Fashion for a healthy lifestyle • Online and in store • Originally in Canada • Looking to expand to Pacific markets • Fairly expensive compared to comparable brands • Ambassadors • Social Media • Soul Cycle Partnership 31
- 32. Appendix! Company Competition Customer • Lululemon • Uniquelyfashionable athletic apparel • Unique technology (luon and ABC type fabrics) • Aspire to healthy living • Manifesto • Educated and sophisticated women • Growing male and female youth market • Generally upper class • Those who understand the importance of an active and healthy lifestyle • Adidas • Nike • Athleta • Lucy • Under Armour Marketing Strategy: 3 C’s 32
- 33. Appendix! 33 WACC comparables LululemonNike Under Armour Gap Cost of Equity Ke 6.10% 6.33% 8.33% 6.48% Cost of Debt Kd 0 3.40% 4.25% 5.95% Debt/Total Value 0 23M 38M 182M Marginal tax rate 30% 30% 30% 30% WACC 6.10% 6.24% 8.13% 6.06%
- 34. Appendix! 34 Discounted CashFlow Analysis (in thousands) Sum of FCF 1,922,127 Sum of DCF 1,495,097 Terminal Value 11,417,959 PV (TV) 7,543,637 Enterprise Value 9,038,734 Cash & Marketable Securities 501,482 Debt 0 Equity Value 9,540,216 Shares Outstanding 127,520 Price per Share 74.81
- 35. Appendix! 35 Historical StockPrices Sheer Legging Scandal 3rd Quarter earnings did not meet analyst expectations 67% increase in inventory value Downsized profit and sales forecast Forecasted a fall in sales in the 4th quarter
- 36. Market Potential ŸUnique Value Proposition Ÿ Financial Growth Ÿ Valuation! Asia could be the biggest contributor to growth of athletic-wear sales 14 16 16 16 17 - 5 10 15 20 2015 2016 2017 2018 2019 Forecasted Athletic-Wear Sales in Asia Billions of Dollars Source: Morgan Stanley Research Estimates 36
- 37. Appendix! 37 Store LocationsWorldwide 2 31 3 279 7 1 Data Source: Statista 2015 Map Source: © 2009 ww.outline-world-map.com