LULU Valuation Deck
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Performed a team-based valuation analysis of Lululemon Athletica, which includes financial and strategic assessments, a DCF analysis, and a final presentation to industry executives and faculty. Valuation as of February 1, 2017.
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LULU Valuation Deck
- 1. lululemon Ashley Simons, Molly Paradies, Michael McHale, Wes Layug, David Febrillet athletica
- 2. Lululemon is positioned for growth and should be valued at $64 per share, compared to the market value of $66 per share Attractive Underlying Markets ● Recognizes large potential for growth in international markets ● Aggressive acceleration in company-operated store openings in Asia e-Commerce Penetration Global Expansion Fairly Valued ● Pushing to improve their website and mobile app for increased online sales ● Efforts expected to become 25% of total revenue by 2022 ● Entering untapped markets and strengthening core business model suggest great growth potential ● The firm is valued at $8.1B, implying a target share price of $64 ● Entering untapped segments with great market share potential ● Aiming for a quarter of revenue to come from their men’s products with a 3.0% CAGR by 2020 2
- 3. Lululemon has experienced significant stock fluctuations over the last two quarters Source: YCharts $66 $58 3
- 5. Lululemon is positioned for growth and should be valued at $64 per share, compared to the market value of $66 per share Attractive Underlying Markets ● Recognizes large potential for growth in international markets ● Aggressive acceleration in company-operated store openings in Asia e-Commerce Penetration Global Expansion Fairly Valued ● Pushing to improve their website and mobile app for increased online sales ● Efforts expected to become 25% of total revenue by 2022 ● Entering untapped markets and strengthening core business model suggest great growth potential ● The firm is valued at $8.1B, implying a target share price of $64 ● Entering untapped segments with great market share potential ● Aiming for a quarter of revenue to come from their men’s products with a 3.0% CAGR 5
- 6. Underlying Markets | e-Commerce | Global Expansion | Valuation Athleisure is expected to maintain a strong global presence 6 0 20 40 60 80 100 120 140 160 180 200 2013 2014 2015 2016 2017 2018 2019 2020 MarketrevenueinbillionU.S.dollars Projected Development of the Global Sports Apparel Market Revenue Source: Statista CAGR 4.1%
- 7. Underlying Markets | e-Commerce | Global Expansion | Valuation Lululemon is the premium brand of fashionable and high- performing athletic apparel 7
- 8. Lululemon uses a unique strategy to differentiate themselves from their competitors in the men’s market 8Underlying Markets | e-Commerce | Global Expansion | Valuation 8
- 9. Underlying Markets | e-Commerce | Global Expansion | Valuation Menswear in the U.S. apparel retail industry is projected to see 3.0% annual growth Goal for men’s business to become a quarter of retail revenue by 2020 9 70 80 90 100 110 120 130 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E SalesinbillionofU.S.dollars Growth in U.S. Menswear Apparel Retail Source: MarketLine CAGR 3.0%
- 10. Lululemon is positioned for growth and should be valued at $64 per share, compared to the market value of $66 per share Attractive Underlying Markets ● Recognizes large potential for growth in international markets ● Aggressive acceleration in company-operated stores openings in Asia e-Commerce Penetration Global Expansion Fairly Valued ● Pushing to improve their website and mobile app for increased online sales ● Efforts expected to become 25% of total revenue by 2022 ● Entering untapped markets and strengthening core business model suggest great growth potential ● The firm is valued at $8.1B, implying a target share price of $64 ● Entering untapped segments with great market share potential ● Aiming for a quarter of revenue to come from their men’s products with a 3.0% CAGR by 2020 10
- 11. Underlying Markets | e-Commerce | Global Expansion | Valuation Lululemon’s direct to consumer sales are increasing 11 0 200 400 600 800 1,000 1,200 1,400 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 SalesinmillionsofU.S.dollars Forecast of Direct to Consumer Sales CAGR: 19.3%
- 12. Underlying Markets | e-Commerce | Global Expansion | Valuation Direct to consumer as a percent of total revenue will increase 12 Total Revenue = Company-Operated + Direct to Consumer + Other 2016 A Company-Operated ● 72.70% Direct to Consumer ● 19.33% 2017 E (our prediction) Company-Operated ● 71.50% Direct to Consumer ● 20.43% 2025 E (our prediction) Company-Operated ● 61.90% Direct to Consumer ● 29.23% 2013 A Company-Operated ● 77.24% Direct to Consumer ● 16.53%
- 13. Underlying Markets | e-Commerce | Global Expansion | Valuation Lululemon is working to improve visual products and app development Digital ecosystem Data intelligence 13
- 14. Lululemon is positioned for growth and should be valued at $64 per share Attractive Underlying Markets ● Recognizes large potential for growth in international markets ● Aggressive acceleration in company-operated store openings in Asia e-Commerce Penetration Global Expansion Fairly Valued ● Pushing to improve their website and mobile app for increased online sales ● Efforts expected to become 25% of total revenue by 2022 ● Entering untapped markets and strengthening core business model suggest great growth potential ● The firm is valued at $8.1B, implying a target share price of $64 ● Entering untapped segments with great market share potential ● Aiming for a quarter of revenue to come from their men’s products with a 3.0% CAGR by 2020 14
- 15. International markets are capturing more market share of athletic apparel 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Market Share of Sportswear Market by Region United States Europe Asia Pacific Others Source: Statista Underlying Markets| e-Commerce | Global Expansion | Valuation 15 16% 16% 17% 17% 19% 17% 21% 20% 22% 24% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Market Share of Sportswear Market by Region United States Europe Asia Pacific Others Source: Statista
- 16. Growth of athletic apparel in Asia is much more aggressive than in other markets 200 348.51 0 50 100 150 200 250 300 350 400 2009 2010 2011 2012 2013 2014 2015 2016 2017 MarketinbillionU.S.dollars Size of Sportswear Market Worldwide CAGR 7.2% Source: Statista $76.9B 2016 Industry Market Share $90.6B 2017E Industry Market Share Underlying Markets| e-Commerce | Global Expansion | Valuation 16
- 17. Rapid expansion in Asia sets Lululemon up for strong growth Lululemon Asia Store Locations Underlying Markets| e-Commerce | Global Expansion | Valuation 201320142015201620172017 Showrooms 17 Singapore 1 Singapore 3 China 6 Hong Kong 3 South Korea 3 Japan 1 Singapore 2 Hong Kong 2 Singapore 3 China 3 Hong Kong 3 South Korea 2 56 2025E Asia Store Locations 11 2016 Asia Store Locations 26 2017E Asia Store Locations Singapore 3 China 3 Hong Kong 3 South Korea 3 Japan 1
- 18. 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Market Share of Sportswear Market by Region United States Europe Asia Pacific Others European expansion for athletic apparel is not as strong as other markets Underlying Markets| e-Commerce | Global Expansion | Valuation 6.1% Asia Pacific CAGR 3.8% Europe CAGR 4.3% Global CAGR Source: Statista, MarketLine 18 Health & Fitness Industry 30% 29% 29% 28% 29% 31% 29% 25% 22% 20% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Market Share of Sportswear Market by Region United States Europe Asia Pacific Others
- 19. Lululemon is positioned for growth and should be valued at $64 per share, compared to the market value of $66 per share Attractive Underlying Markets ● Recognizes large potential for growth in international markets ● Aggressive acceleration in company-operated store openings in Asia e-Commerce Penetration Global Expansion Fairly Valued ● Pushing to improve their website and mobile app for increased online sales ● Efforts expected to become 25% of market revenue by 2022 ● Entering untapped markets and strengthening core business model suggest great growth potential ● The firm is valued at $8.1B, implying a target share price of $64 ● Entering untapped segments with great market share potential ● Aiming for a quarter of revenue to come from their men’s products with a 3.0% CAGR by 2020 19
- 20. Underlying Markets | e-Commerce | Global Expansion | Valuation The number of Lululemon stores around the world is continuing to grow 20
- 21. Underlying Markets | e-Commerce | Global Expansion | Valuation The number of Lululemon stores around the world is continuing to grow, driving revenue growth but increasing costs 21 EBIT
- 22. Underlying Markets | e-Commerce | Global Expansion | Valuation Our value drivers determined our assumptions Average Square Feet 24 sq. ft. per year Direct to Consumer Revenue 2014 2016 2017E... ...2025E % of Rev: 18% 19% 20% 29% Growth Rate: 22% 13% 21% 8% Asia Store Openings 2017: 15 stores Subsequent Growth: (2018 - 2025) 10% Average Sales/Square Foot $20 per year SG&A 2014 2016 2017E... ...2025E % of Rev: 30% 33% 34% 31% 22
- 23. Underlying Markets | e-Commerce | Global Expansion | Valuation The firm is valued at $8.1B, implying a target share price of $64 Financial Assumptions Key Results ● Risk-free rate: 2.47% ● Beta: 0.949 ● WACC: 7.77% ● Terminal Growth Rate: 3.0% ● Terminal forecast year: 2025 ● Tax Rate: 35% $2.6B 2025E Revenue: Company-Operated $1.2B 2025E Revenue: Direct to Consumer $4.2B 2025E Revenue $800M 2025E EBIT $64 Price Per Share 23
- 24. Key drivers of our valuation model Underlying Markets | e-Commerce | Global Expansion | Valuation 24
- 25. Underlying Markets | e-Commerce | Global Expansion | Valuation Due to its sensitivity to WACC and Terminal Growth Rate, Lululemon could be valued between $58 - $71 Terminal Growth Rate 2.50% 2.75% 3.00% 3.25% 3.50%WACCß 6.90% 7.50% 7.77% 8.06% 8.62% 0.8 0.9 0.949 1.0 1.1 25
- 26. Underlying Markets | e-Commerce | Global Expansion | Valuation Cutting costs presents Lululemon with the opportunity to increase its market value SG&A as % of Revenue 32% 33% 34% 35% 36% 48% 49% 50% 51% 52% COGSas%ofRevenue 26
- 27. Underlying Markets | e-Commerce | Global Expansion | Valuation There are potential risks to Lululemon’s value and growth Men’s Costs Competition 27
- 28. Lululemon is positioned for growth and should be valued at $64 per share, compared to the market value of $66 per share Attractive Underlying Markets ● Recognizes large potential for growth in international markets ● Aggressive acceleration in company-operated store openings in Asia e-Commerce Penetration Global Expansion Fairly Valued ● Pushing to improve their website and mobile app for increased online sales ● Efforts expected to become 25% of total revenue by 2022 ● Entering untapped markets and strengthening core business model suggest great growth potential ● The firm is valued at $8.1B, implying a target share price of $64 ● Entering untapped segments with great market share potential ● Aiming for a quarter of revenue to come from their men’s products with a 3.0% CAGR by 2020 28
Editor's Notes
- Will they keep the men’s brand separate or create a separate chain? → implications for number of stores (depreciation/capx/stores) undervalued and then stock dropped to 40--> What happened since? Company’s recent releases in info
- CEO Laurent Potdevin had said during the first quarter that the year was off to a "slow start" amid weak online sales and competition from companies like Under Armour and Amazon that were also designing workout clothes suitable for everyday wear Lululemon said adjusted earnings per share in the first quarter was $0.32, beating analysts' forecast for $0.28, according to Bloomberg. Net revenue totaled $520.31 million, ahead of the estimate for $513.69 million.
- Will they keep the men’s brand separate or create a separate chain? → implications for number of stores (depreciation/capx/stores) undervalued and then stock dropped to 40--> What happened since? Company’s recent releases in info
- Describe chart Lulu has tapped into the male market using their comfortable yet professional slacks, introducing the brand to men through a product that is unique from its competitors and will then encourage their male customers to continue shopping at Lulu
- Lulu has achieved a balance between performance and fashion: the company is positioned to cater to male market with products that are both fashionable and functionable, particularly through innovative technology in fabrics→ Silverescent There is evidently a danger associated with competing too closely with Nike: However, Lulu has differentiated itself through its utilization of athleisure How did under armour evolve? (Appendix)
- Lulu has tapped into the male market through their comfortable yet professional slacks. By using this strategy, Lulu is introducing their brand to men through products that are unique from their close competitors, such as Nike, and will then encourage their male customers to continue shopping at Lulu
- -Describe graph: Bigger square footage in new stores for men’s products: reflected in model -CAGR compound annual growth rate: 3%--> industry will grow annually by 3% through 2025 -Leading to Lulu’s goal for men’s business will become a quarter of the business by 2020 -This goal is reflected in our growing average store size, which increases by 24 square feet per year beginning in 2017 to accommodate the expanding array of men’s products
- Will they keep the men’s brand separate or create a separate chain? → implications for number of stores (depreciation/capx/stores) undervalued and then stock dropped to 40--> What happened since? Company’s recent releases in info
- Research shows this, but we think that we need to be more conservative (our model)
- A big key of its digital strategy is data — specifically data intelligence Investing in the development of a digital ecosystem Working with AgilOne, a CRM engine and data intelligence company Provide insight on everything related to customer behavior, transactions data to social media, what customers are likely to buy and this will allow this brand to personalize the customer experience Create genuine authentic engagement and help customers in their journey Be a global “connector” from the company to their consumers
- Will they keep the men’s brand separate or create a separate chain? → implications for number of stores (depreciation/capx/stores) undervalued and then stock dropped to 40--> What happened since? Company’s recent releases in info
- Will they keep the men’s brand separate or create a separate chain? → implications for number of stores (depreciation/capx/stores) undervalued and then stock dropped to 40--> What happened since? Company’s recent releases in info
- MEKKO add ins
- MEKKO add ins
- Need to add dates & rework structure !! Rework layout
- 3% overvalue
- Title: something about how these support a valuation range of $50-$80 Hard to find a reasonable beta (since the market has been going up, but Lulu has been going up and down) → settled on Bloomberg Solid business (but we are conservative) → look where they could be
- One more thing that shows what they could be doing to improve their value
- Broken car that needs to be fixed But our model is conservative and pops up lower than market is trading So maybe market is too pessimistic today (tie into stock price drop) We think they have potential, but they need to better implement some of the value drivers we talked about What they can do to mitigate these risks...
- Will they keep the men’s brand separate or create a separate chain? → implications for number of stores (depreciation/capx/stores) undervalued and then stock dropped to 40--> What happened since? Company’s recent releases in info