Number of lululemon stores 2017

On June 1, 2017, shareholders of lululemon athletica—a designer and retailer of high-tech athletic apparel sold under the lululemon athletica and ivivva athletica brand names—were pleasantly surprised by the company’s announcement of a stronger-than-expected 5 percent increase in sales revenues in the first quarter of fiscal 2017 compared to the first quarter of fiscal 2016. But shareholders were still uneasy about the company’s prospects.

Two months earlier, on March 29, 2017, lululemon CEO Laurent Potdevin had told Wall Street analysts in a conference call that the company was off to a slow start in 2017, an outcome he attributed mainly to customer disappointment with the heavy emphasis on all-black and all-white assortments of apparel items on store racks and the merchandise displays on the company’s e-commerce website. In times past, lululemon’s offerings of fitness and workout gear had included many bold-color and patterned selections that were among the company’s best-selling items. Potdevin went on to say, “We should have been bolder with the color assortment. You are going to see more color showing up and we’ve added creative resources to bring visual merchandising to life in a more powerful way.”

During the same conference call, lululemon said that it foresaw fiscal 2017 revenues of between $2.55 billion to $2.6 billion and per-share earnings of $2.26 to $2.36, numbers that were below Wall Street’s current 2017 estimates of $2.62 billion in revenues and earnings of $2.56 per share. Investors swiftly responded to the forecasts of lower sales and earnings by punishing lululemon’s stock price. In after-hours trading on March 29, lululemon’s stock price fell 18 percent below the day’s $66.30 closing price. By the close of trading on March 30, 2017, lululemon’s stock price had declined to $50.76, some 23.5 percent below the price 24 hours earlier. Over the next 11 weeks, the company’s stock price traded between $48 and $54, closing on June 9, 2017, at $50.70, nearly 37 percent below the all-time high price of $81.81 in March 2013 when troubling signs of a falloff in store sales and customer traffic first began to appear at lululemon.

From modest beginnings as a family-owned startup company with 14 stores and sales of $40.7 million in January 2005, lululemon had rocketed to retailing prominence in North America during 2006 to 2012, building a fast-growing chain of over 200 retail stores in Canada and the United States that sold fashionable high-tech yoga and workout apparel at premium prices. Net sales rose 38 percent to almost $1.4 billion in fiscal year 2012 (ending February 3, 2013). But in March 2013, the company’s highly regarded brand image took a hit when design and quality problems in its women’s black Luon fabric bottoms provoked widespread complaints from customers that the sheer nature of the fabric was too revealing page 280of the garments worn underneath. The design flaw was widely publicized in the media, chiefly because lululemon had become a high-profile, fast-growing company with a popular and somewhat glamorous product offering and because its rapidly rising stock price had attracted considerable investor attention.

Over the next four years, annual sales revenue growth at lululemon stores remained stubbornly stuck far below the 37.9 percent gain in fiscal 2012—revenues grew 16.1 percent in fiscal 2013, 12.9 percent in 2014, 14.6 percent in 2015, and 13.8 percent in 2016. Moreover, average annual sales at lululemon’s retail stores open at least 12 months had dropped from a record high of $5.83 million per store in fiscal 2012, to $5.44 million in 2013, to $4.95 million in 2014, to $4.57 million in 2015, to $4.47 million in 2016—a disturbingly large 23.3 percent decline.

Not surprisingly, lululemon executives were doing their best to identify effective ways to rejuvenate the company’s sales growth. The issues of what to do seemed to hinge on answering several questions. Were the two disappointing performance metrics of slower revenue growth and eroding sales per retail store only a reflection of lingering damage to the company’s brand image stemming from the embarrassing publicity surrounding the revealing nature of the Luon fabric bottoms? Or were other troublesome factors also at work? Was the market signaling that the “fad for lululemon apparel” was over? Had the heretofore “must have” appeal of lululemon’s functional and stylish apparel among fitness-conscious women been undercut by mounting competition from rival makers of women’s fitness apparel, like The Gap’s 55 new Athleta-branded retail stores that specialized in women’s fitness apparel?

Had the recent moves of Under Armour, Nike, and adidas to offer much bigger selections of fashionable, high performance athletic and fitness apparel for women drawn sales and market share away from lululemon? Could the slowdown in revenue growth be due to a significant fraction of the company’s customers switching to lower-priced brands and/or brands they considered to be more trendy or appealingly designed? Were all of these factors in play and, if so, what market opportunities remained for lululemon management to pursue to pump up the company’s performance?

Likewise, the company’s shareholders were in a quandary about whether to hold onto their shares in hopes of a big turnaround in the company’s future prospects or to sell their shares and shift the proceeds to other investments. Even if top management came up with some promising ways to spur the company’s sales and profitability, how long would it be before stockholders could reasonably expect for the company’s $51 stock price (as of June 9, 2017) to climb steadily toward $80 per share (where it was trading in March 2013)?

Company Background

A year after selling his eight-store surf, skate, and snowboard-apparel chain called Westbeach Sports, Chip Wilson took the first commercial yoga class offered in Vancouver, British Columbia, and found the result exhilarating. But he found the cotton clothing used for sweaty, stretchy power yoga completely inappropriate. Wilson’s passion was form-fitting performance fabrics and in 1998 he opened a design studio for yoga clothing that also served as a yoga studio at night to help pay the rent. He designed a number of yoga apparel items made of moisture-wicking fabrics that were light, form-fitting, and comfortable and asked local yoga instructors to wear the products and provide feedback. Gratified by the positive response, Wilson opened lululemon’s first real store in the beach area of Vancouver in November of 2000.

While the store featured yoga clothing designed by Chip Wilson and his wife, Shannon, Chip Wilson’s vision was for the store to be a community hub where people could learn and discuss the physical aspects of healthy living—from yoga and diet to running and cycling, plus the yoga-related mental aspects of living a powerful life of possibilities. But the store’s clothing proved so popular that dealing with customers crowded out the community-based discussions and training about the merits of living healthy lifestyles. Nonetheless, Chip Wilson and store personnel were firmly committed to healthy, active lifestyles, and Wilson soon came to the conclusion that for the store to provide staff members with the salaries and opportunities to experience fulfilling lives, the one-store company needed to expand into a multi-store enterprise. Wilson believed that the increasing number of women participating in sports—and specifically page 281yoga—provided ample room for expansion, and he saw lululemon athletica’s yoga-inspired performance apparel as a way to address a void in the women’s athletic apparel market. Wilson also saw the company’s mission as one of providing people with the components to live a longer, healthier, and more fun life.

Several new stores were opened in the Vancouver area, with operations conducted through a Canadian operating company, initially named Lululemon Athletica, Inc., and later renamed lululemon canada, inc. In 2002, the company expanded into the United States and formed a sibling operating company, Lululemon Athletica USA Inc. (later renamed as lululemon usa, inc), to conduct its U.S. operations. Both operating companies were wholly owned by affiliates of Chip Wilson. In 2004, the company contracted with a franchisee to open a store in Australia as a means of more quickly disseminating the lululemon athletica brand name, conserving on capital expenditures for store expansion (since the franchisee was responsible for the costs of opening and operating the store), and boosting revenues and profits. The company wound up its fiscal year ending January 31, 2005, with 14 company-owned stores, 1 franchised store, and net revenues of $40.7 million. A second franchised store was opened in Japan later in 2005. Franchisees paid lululemon a one-time franchise fee and an ongoing royalty based on a specified percentage of net revenues; lululemon supplied franchised stores with garments at a discount to the suggested retail price.

Five years after opening the first retail store, it was apparent that lululemon apparel was fast becoming something of a cult phenomenon and a status symbol among yoga fans in areas where lululemon stores had opened. Avid yoga exercisers were not hesitating to purchase $120 color-coordinated lululemon yoga outfits that felt comfortable and made them look good. Mall developers and mall operators quickly learned about lululemon’s success and began actively recruiting lululemon to lease space for stores in their malls.

In December 2005, with 27 company-owned stores, 2 franchised stores, and record sales approaching $85 million annually, Chip Wilson sold 48 percent of his interest in the company’s capital stock to two private equity investors: Advent International Corporation, which purchased 38.1 percent of the stock, and Highland Capital Partners, which purchased a 9.6 percent ownership interest. In connection with the transaction, the owners formed lululemon athletica inc. to serve as a holding company for all of the company’s related entities, including the two operating subsidiaries, lululemon canada inc. and lululemon usa inc. Robert Meers, who had 15 years of experience at Reebok and was Reebok’s CEO from 1996 to 1999, joined lululemon as CEO in December 2005. Chip Wilson headed the company’s design team and played a central role in developing the company’s strategy and nurturing the company’s distinctive corporate culture; he was also chairman of the company’s Board of Directors, a position he had held since founding the company in 1998. Wilson and Meers assembled a management team with a mix of retail, design, operations, product sourcing, and marketing experience from such leading apparel and retail companies as Abercrombie & Fitch, Limited Brands, Nike, and Reebok.