Lululemon Athletica Inc – November 10, 2022

Sporting brand ambassadors like the youngest surfer to ever win the US Open, a veteran of the Canadian snowboard circuit, and a 400-meter world record holder, among many other pro athletes, Lululemon Athletica has become a juggernaut as a designer, distributor, and retailer of its range of healthy lifestyle inspired athletic apparel and accessories.

With a steadfast focus on top quality, technically advanced products that offer unique innovations, the company’s assortment of apparel is marketed under the Lululemon brand and its “living the sweatlife” mantra. The range includes pants, shorts, tops, jackets and other gear that are designed for active athletic activities such as yoga, running, training, and other sweaty pursuits. Lululemon’s design and development team continuously seek out technically advanced fabrics, that offer a new feel and fit, and make it possible to craft innovative functional features for the company’s products.

The retailer sells its collections through a chain of hundreds of company-operated stores, outlets, and warehouse sales, along with a network of wholesale accounts that includes yoga studios, health clubs, and fitness centers. In addition, the company also uses temporary locations and maintains third-party licenses and supply arrangements with many international distributors. In recent years, online channels including mobile apps and the Lululemon.com e-commerce website are also supporting direct-to-consumer demand.

Lululemon’s track record of innovation along with continued expansion into new product lines and geographies has produced an impressive record of consistent growth over the past two decades. While the company’s efforts to create excellent online and offline experiences for all customers have generated a loyal following. Building on this, the retailer is in the midst of a comprehensive strategic plan that began in 2021 that intends to double the size of the business by 2026.

Founded by Chip Wilson in Canada in 1998, Lululemon started as a design studio by day and a yoga studio by night, the company’s vision was to create more than a place where people could get gear to sweat in. It wanted to create a community hub where people could learn and discuss healthy living and mindfulness, while forming relationships with customers to understand what they are passionate about.

The company went public in 2007 after raising almost $330 million, and by 2013 it had made its third consecutive appearance on Fortune’s Fastest-Growing Companies list. A year later, Lululemon opened its first store in Europe, a flagship shop in London.

More than two decades since it began, Lululemon continues to focus on healthy living, mindfulness, and connecting with customers in its stores around the globe to continuously innovate its products. As the company believes the credibility of the brand and the authenticity of community experiences has been critical in creating a market beyond just athletes to those who pursue an active, mindful, and balanced life.

Joining Lululemon in 2018, Calvin McDonald is the current chief executive officer. The growth-oriented leader has an extensive history record helping large organizations scale and innovate how their brands engage with customers in stores, across digital channels, and from their homes. Previously, he served as president and CEO of Sephora Americas, a division of the LVMH group of luxury brands, before which he was president and CEO of Sears Canada, along with almost two decades at Loblaw Companies, the largest retailer in Canada.

Playing a critical role in leveraging innovative technology to transform Lululemon’s retail business and enhance guest experiences, Julie Averill has served as executive vice president and chief technology officer of the company since 2017. Prior to joining Lululemon, Averill served as the first-ever chief information officer of outdoor specialty retailer, REI, and she also spent over a decade at Nordstrom, where she held several key positions on the company’s IT leadership team.

Lululemon’s diverse line of apparel focuses on clothing that people can wear as they engage in fitness activities, although in addition to clothing, the company also sells accessories such as bags, socks, and yoga mats. And while the company’s products are mostly targeted at women who aim for a healthy lifestyle while balancing a busy life, it has expanded its reach by also bringing men and youth into its fold.

Complementing its apparel line, Lululemon acquired in-home fitness company MIRROR, in 2020. The interactive workout platform which features live and on-demand classes, bolstered the company’s digital offerings and brought immersive and personalized in-home mindfulness content to new and existing customers.

The bulk of Lululemon’s business is conducted through company-operated stores and direct-to-consumer channels with 600 stores that are located primarily on street locations, lifestyle centers, and malls, in 17 countries across the globe. In addition to being a venue to sell its products, the company utilizes them as a direct connection to customers to help build its brand and product line. Through a vertical retail strategy that allows Lululemon more control along the entire manufacturing and distribution process, coupled with its efforts to create this connection with customers, the retailer can collect and incorporate unique feedback into its design process to advance its product lines and differentiate from the competition.

The company also operates outlets and temporary locations to sell low-moving inventory and items from prior seasons at discounted prices. Wholesale accounts that include premium yoga studios, health clubs, and fitness centers offer an alternative distribution channel that is convenient for the core demographic and enhances the image of the brand. While license and supply arrangements take advantage of highly complementary partnerships in certain target markets like the Middle East and Mexico which grant partners the right to operate Lululemon-branded retail locations.

Underpinning Lululemon’s strategic objectives is its Power of Three x2 Growth Plan. Consisting of three key pillars which include product innovation, guest experience, and market expansion, the plan calls for a doubling of the business, taking revenue of $6.25 billion in 2021 to $12.5 billion by 2026.

To achieve this, Lululemon intends to double men’s, double direct-to-consumer, and quadruple international revenue relative to 2021. At the same time, the company’s women’s business, stores, and North American operations are all expected to grow by double digits. Although Lululemon’s largest customer group comes from its women’s range, representing 67% of revenue, it also designs a comprehensive men’s line which is growing rapidly as men discover the technical rigor and premium quality of the company’s range of products.

North America is currently Lululemon’s largest market by geographical split, representing 85% of its 2021 net revenue. However, the Power of Three plan has the company rapidly expanding internationally across China, the rest of Asia Pacific, and Europe. In the last year, the retailer opened 53 new company-operated stores, including 43 stores outside of North America. And in keeping with its connection to customers, it is approaching the expansion in these regions with a decentralized model, allowing for local community insight and consumer preferences to maintain its continuous innovation and efforts to broaden merchandise offerings.

These efforts are set to continue in 2022 with further expansion of apparel lines that will offer new styles including heat retention and reflective detailing to enable outdoor runs in cooler and low light conditions as the seasons shift. While additions to the company’s new hiking category will include heavier styles to protect against the elements during cold weather outings. The new lines are expected to open a broad new category for outdoor and cold weather solutions, bringing in a previously underserved segment.

Lululemon has also had an increasing focus on e-commerce given its convenience and potential to reach new customers beyond its physical locations, which has proved particularly effective in building brand awareness. Consequently, the company continues to evolve and integrate its digital and physical channels to create the best possible customer experience.

Despite challenges in the macro-environment for most retailers, Lululemon has managed to maintain incredible results across both its physical stores and its e-commerce sites. In the last 20 quarters, the company has beaten analyst earnings expectations an astonishing 19 times.

A strong financial performance was again delivered in the most recent second quarter of the 2023 financial year, where net revenue increased almost 30% to $1.9 billion. Furthermore, it achieved this growth without any discounts on its products, whilst also passing on costs to consumers, ultimately producing margins that improved by more than 56%.

As a result, gross profit increased 25% to $1.1 billion, while net income rose almost 40% to $289.5 million, maintaining an impressive run of significant year-on-year growth for the last six consecutive quarters.

The momentum appears to be showing no signs of stopping as the company expects revenue to hit almost $8 billion for the year, representing a three-year compound annual growth rate of approximately 26%.

Looking ahead, consensus estimates also have Lululemon closing out the full year with expected revenue of $7.93 billion representing year-over-year growth of 27%. While full-year earnings per share estimates for 2023 are also forecasted to improve by 27% to $9.90 per share, up from $7.79 at the year-end Jan 2022.

Competition in the athletic apparel industry is highly competitive and based principally on brand image and recognition as well as perceived product quality, innovation, style, distribution, and price. It includes increasing challenges from established companies that are expanding their production and marketing of performance products, as well as from frequent new entrants to the market. Lululemon is in direct competition with wholesalers and direct sellers of athletic apparel, such as Nike, Adidas, Under Armour, and Columbia Sportswear. It also competes with retailers who have expanded to include women’s athletic apparel including The Gap, Victoria’s Secret with its sport and lounge offering, and Urban Outfitters.

Yet the company believes that it successfully competes on the basis of its premium brand image and technical product innovation. Its ability to introduce new product innovations, combine function and fashion, and connect through in-store, online, and community experiences also sets it apart from the competition.

Lululemon’s commitment to listening to its customers and innovation for over two decades has created a strong brand that is fashionable, functional, and provides a distinctive experience that has driven customer loyalty and global growth. Despite consistently exceeding market expectations with impressive growth quarter after quarter, the company is only at the start of its life cycle, and has significant opportunities to expand its footprint which are being taken advantage of with a comprehensive strategic plan.