Three external forces have been identified that impact the way lululemon operates.
These highlighted external factors include social trends, economic conditions, and charitable opportunities. Lululemon’s focus is on yoga inspired athletic apparel. Today yoga is no longer a fitness fad, but has become a lifestyle trend. Unfortunately, trying to appeal to the social growth of an active and healthy lifestyle has created a trend in the textile industry of making unsubstantial claims about sustainable fibers in clothing such as seaweed, bamboo and soybeans.In 2007, lululemon released their vitasea line, which was infused with seaweed fiber and claimed to have therapeutic benefits. The Competition Bureau along with a test administered by the New York Times, were unable to prove lululemons’ claims. 24 The Textiles Labelling Act states that “it is illegal to make false or misleading claims related to a garment, including in regards to its fiber content.
“25 Therefore, the Competition Bureau had lululemon remove all claims and labels indicating that the Vitasea line had health benefits.26 Lululemon also promotes functional everyday clothing as many women sport lululemon’s stylish “groove pants” or hooded sweaters as casual wear. This gives lululemon a competitive edge in the athletic apparel industry. 27 Economic conditions also impact the way lululemon operates, as they can adversely affect consumer spending. Lululemon is considered a specialty retailer and because of this, their operations depend significantly on economic conditions. The current instability in the United States economy has resulted in an overall decrease in the growth of the retail sector because of decreased consumer spending.This has negatively affected lululemon’s sales.
28 The recent economic downturn has also had some positive effects on lululemon. Instead of price reductions, lululemon expanded their product line and invested in improving the quality and varieties of their athletic wear. In doing so they were able to attract customers into the store with new and improved products, namely their new running outfits. 29 Before the recession, lululemon was facing a mass expansion strategy and growth into the United States. This forced lululemon to slow down and re-evaluate their expansion strategy.
In 2008, lululemon opened 35 stores in the United States of which proved to be the least successful in lululemon’s history. By re-assessing their expansion strategy and conducting more in-depth research, lululemon was able to determine their most profitable locations. Understanding the profit centres contributed to higher than expected fourth quarter results in the following year. 30 Lululemon is committed to building strong community relationships. This is possible through their Charitable Giving program.This program allows customers to submit which charities they would like the lululemon to support, after which the company selects eight recipients.
As a corporate social responsibility leader, lululemon also supports the Centre for Integrated Healing, an organization dedicated to the holistic treatment and prevention of cancer. In addition, they support the Silken Laumann’s community-oriented Active Kids Movement, a national charity established to increase the physical activity levels of Canadian children and prevent childhood obesity. 31 Horizontal and Vertical AnalysisLululemon has seen significant, consistent growth from 2006 to 2010. Revenues were moderate in 2006 and 2007 before the IPO in 2007.
After the IPO Lululemon posted 25 percent growth between 2007 and 2008, 78 percent growth between 2008 and 2009, and levelling off to 68 percent between 2009 and 2010. In terms of profit margin, Lululemon started in 2007 being three percent behind its least profitable competitor, posting a five percent profit margin. In 2008, Lululemon had the second highest profit margin, next to Adidas, with an 11 percent profit margin.In 2009, Lululemon surpassed the industry average and became the leader in profitability showing and 11 percent profit margin while its nearest competitor; Adidas posted a 10 percent profit margin. The following graphs represent this data. Profitability Ratios The Lululemon profitability ratios are consistent with its continual growth. As previously stated, the Lululemon profitability margin is considerably higher than the industry average and its nearest competitor. Its return on equity (ROE) also showed significant growth from 2007 to 2010.
Lululemon remained 20 percent above the industry average and 40 percent higher than its nearest competitor. Earnings per share remained consistent with its growth in all other areas. Its EPS grew from $0.
68 in 2008 up to $1. 15 in 2010. It appears from the ratios and the analysis that lululemon has been able to remain sustainably profitable throughout the economic recession and remain ahead of its competition. Lululemon may be a smaller company, however it is far more profitable and much more efficient than its competition according to its profitability ratios.Liquidity The liquidity of lululemon continues to be above an industry average that includes Nike, Adidas, and Under Armour.
Although lululemon is new to this defined industry, which includes well-established organizations that have been able to diversify into equipment manufacturing, they are performing on par with industry leader Nike. Nike, Adidas, and Under Armour do not showcase the boutique like status that lululemon does. Currently lululemon is not a wholesaler and deals with direct customer transactions.The average collection period of lululemon is low due to the direct link between the end customer and the organization where receivables can be mostly attributed to major credit card companies. They are not supplying external organizations therefore there are less large credit sales. There is a decline in receivable turnover in 2010, which could be attributed to the recent opening of franchise operations in locations around the world. Solvency Lululemon continues to perform well below the defined industry average.
Being a new company to this industry they have been able to manage their debt load effectively even with an industry wide increase in debt. From 2008 onwards, lululemon has consistently declined. Under Armour and Nike are above average by 10 and 20 percent respectively, whereas Adidas is well below the average. This may be a result of Adidas being the oldest of the companies and well established. Minimal financing by lululemon has kept the interest expense relatively low in comparison; they rely heavily on funds raised in public trading to grow their company.Through consistently managing their debt, lululemon continues to remain well solvent.
After lululemon’s IPO in July of 2007, their price to book ratios showed that they are highly valued and traded at a premium. There was a sharp decline from 2008 to 2009. At this time, lululemon began to appear as high risk with looming lawsuits and risky advertising practices. With those issues behind them there is a steady rise in perceived value of lululemon as they enter the arena with large established companies.