Details to be attached
Case Study: Historical Financial Analysis Assignment Instructions
Overview
Complete a case study of ABC Corporation. You will find the case in the case section of the text.
A formal, in-depth case study analysis requires you to utilize the entire strategic management process. Assume you are a consult asked by the ABC Corporation to analyze its external/internal environment and make strategic recommendations. You must include exhibits to support your analysis and recommendations.
Instructions
The completed case study must include these components, with portions to be submitted over several modules as the Case Study: Matrices Assignment, the Case Study: Historical Financial Analysis Assignment, and the Case Study: Projections, NPV, Compilation Assignment.
·
Cover page (must include the company name, your name, the date of submission, and a references page; the document must follow current APA guidelines)
· A total of 12 – 15 pages (for all three parts, combined) of narrative text, this does not include the financial statements, reference pages, or matrices
· Reference page (follow current APA guidelines)
· Historical Financial Statements, Proforma Financial Statements, NPV Calculations and a Cost Sheet for the strategy in an Excel document
· Matrices, which must be exhibits/attachments in the appendix and not part of the body of the analysis (The Strategy Club has excellent templates/examples for exhibits and matrices).
Your Case Study: Historical Financial Analysis Assignment paper must include:
1. Historical Financial Statements (Income Statement, Balance Sheet and Statement of Cash Flows) from the 3 most current years for the firm. These should be downloaded from the SEC website. The financial statements must include horizontal (shown between the years) and vertical analysis (shown to the right of the last year of historical data).
2. Ratio analysis for the ratios shown on Table 1 in the Guide to Case Analysis (CA) of the textbook:
a. Profitability ratios
b. Liquidity ratios
c. Leverage ratios
d. Activity ratios
e. Price-to-earnings ratio
f. The changes between years are included in the calculations.
3. Competitor ratios to compare with the ratios that were calculated in item 2. These should be included on the same tab as the ratio analysis for the firm.
4. Financial analysis should include comparisons to the firm’s main competitor as well as to the industry. How does the financial position of the firm influence the strategic direction of the company? This section should not be used to define what each ratio is rather it should clearly provide analysis based on the calculations as to the strategic choices and implications of the firm’s financial position. A compare and contrast with the main competitor should be included in this section of narrative.
Options to Download SEC Financial Data into Excel Spreadsheets:
There are two ways to pull financial data in Excel format from the SEC site, depending on how recent the information is.
OPTION 1: For filings that are a year or two old
· Go to www.sec.gov.
· In the Filings & Forms box, click on Search for Company Filings.
· Then click on Company or fund name, ticker symbol, CIK (Central Index Key), file number, state, country, or SIC (Standard Industrial Classification).
· Enter either a company name or ticker symbol into the appropriate box. (Note: it may be easier to use a ticker symbol because this guarantees you have the right company.) Choose Find Companies.
· On the next screen, select the appropriate filing or filter by filing type (10-K).
· Newer filings have two button options: Documents and Interactive Data. Select Interactive Data if that is an option.
· Once in Interactive Data, select financial statements. A drop-down box will appear in the left-hand column. Select the statement that you want. Then, click View Excel Document above the left-hand column.
·
OPTION 2: For older filings
· Follow the steps in Option 1 to get to the company filing screen. Since Interactive Data will not be available, click on Documents.
· There will be several options. Find the link containing the full filing. This is usually the first link but not always. For a 10-K filing look for a link titled 10-K.
· Open Excel. Click on the Data tab in the ribbon and select From Web, the second icon from the left.
· A web browser will open up. Copy the link from the company 10-K and insert it into the New Web Query browser that opened up. Click Go to be taken to the filing. (Note: The browser sometimes runs slow.)
· Find the financial tables you wish to import. Above the tables you should see a yellow box with a black arrow pointing to the right. Click on each box corresponding with each financial table that you wish to import. The box will turn green with a check mark.
· Once all desired tables are selected, click the Import button at the bottom right of the web browser.
· You will be taken back into the Excel spreadsheet with an Import Data box open. To import the data, select either a cell in the existing worksheet or New Worksheet and click OK.
· Data will be uploaded into Excel. Note that this process does a poor job of formatting the tables. Brackets indicating negativity and currency symbols are often placed in adjacent cells, necessitating manual entry. For year-over-year analysis across multiple filings be careful to ensure that financial sheet items line up with one another.
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WHY USE CASES TO PRACTICE STRATEGIC
MANAGEMENT?
A student of business with tact
Absorbed many answers he lacked.
But acquiring a job,
He said with a sob,
“How does one fit answer to fact?”
The foregoing limerick was used some years ago by Professor Charles Gragg to
characterize the plight of business students who had no exposure to cases. The
facts are that the mere act of listening to lectures and sound advice about managing
does little for anyone’s management skills and that the accumulated managerial
wisdom cannot effectively be passed on by lectures and assigned readings alone. If
anything had been learned about the practice of management, it is that a
storehouse of ready-made textbook answers does not exist. Each managerial
situation has unique aspects, requiring its own diagnosis, judgment, and tailor-made
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actions. Cases provide would-be managers with a valuable way to practice wrestling
with the actual problems of actual managers in actual companies.
The case approach to strategic analysis is, first and foremost, an exercise in
learning by doing. Because cases provide you with detailed information about
conditions and problems of different industries and companies, your task of
analyzing company after company and situation after situation has the twin benefit
of boosting your analytical skills and exposing you to the ways companies and
managers actually do things. Most college students have limited managerial
backgrounds and only fragmented knowledge about companies and real-life
strategic situations. Cases help substitute for on-the-job experience by (1) giving
you broader exposure to a variety of industries, organizations, and strategic
problems; (2) forcing you to assume a managerial role (as opposed to that of just
an onlooker); (3) providing a test of how to apply the tools and techniques of
strategic management; and (4) asking you to come up with pragmatic managerial
action plans to deal with the issues at hand.
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Objectives of Case Analysis
Using cases to learn about the practice of strategic management is a powerful way
for you to accomplish five things:
If you understand that these are the objectives of case analysis, you are less likely to
be consumed with curiosity about “the answer to the case.” Students who have
grown comfortable with and accustomed to textbook statements of fact and
definitive lecture notes are often frustrated when discussions about a case do not
produce concrete answers. Usually, case discussions produce good arguments for
more than one course of action. Differences of opinion nearly always exist. Thus,
should a class discussion conclude without a strong, unambiguous consensus on
what to do, don’t grumble too much when you are not told what the answer is or
what the company actually did. Just remember that in the business world answers
don’t come in conclusive black-and-white terms. There are nearly always several
feasible courses of action and approaches, each of which may work out
satisfactorily. Moreover, in the business world, when one elects a particular course
of action, there is no peeking at the back of a book to see if you have chosen the
best thing to do and no one to turn to for a provably correct answer. The best test
of whether management action is “right” or “wrong” is results. If the results of an
2
1. Increase your understanding of what managers should and should not do in
guiding a business to success.
2. Build your skills in sizing up company resource strengths and weaknesses and
in conducting strategic analysis in a variety of industries and competitive
situations.
3. Get valuable practice in identifying strategic issues that need to be addressed,
evaluating strategic alternatives, and formulating workable plans of action.
4. Enhance your sense of business judgment, as opposed to uncritically accepting
the authoritative crutch of the professor or “back-of-the-book” answers.
5. Gain in-depth exposure to different industries and companies, thereby
acquiring something close to actual business experience.
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action turn out to be “good,” the decision to take it may be presumed “right.” If
not, then the action chosen was “wrong” in the sense that it didn’t work
out.
Hence, the important thing for you to understand about analyzing cases
is that the managerial exercise of identifying, diagnosing, and recommending is
aimed at building your skills of business judgment. Discovering what the company
actually did is no more than frosting on the cake—the actions that company
managers actually took may or may not be “right” or best (unless there is
accompanying evidence that the results of their actions were highly positive).
The point is this: The purpose of giving you a case assignment is not to cause you
to run to the library or surf the Internet to discover what the company actually did
but, rather, to enhance your skills in sizing up situations and developing your
managerial judgment about what needs to be done and how to do it. The aim of
case analysis is for you to become actively engaged in diagnosing the business
issues and managerial problems posed in the case, to propose workable solutions,
and to explain and defend your assessments—this is how cases provide you with
meaningful practice at being a manager.
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Preparing a Case for Class Discussion
If this is your first experience with the case method, you may have to reorient your
study habits. Unlike lecture courses where you can get by without preparing
intensively for each class and where you have latitude to work assigned readings
and reviews of lecture notes into your schedule, a case assignment requires
conscientious preparation before class. You will not get much out of hearing the
class discuss a case you haven’t read, and you certainly won’t be able to contribute
anything yourself to the discussion. What you have got to do to get ready for class
discussion of a case is to study the case, reflect carefully on the situation presented,
and develop some reasoned thoughts. Your goal in preparing the case should be to
end up with what you think is a sound, well-supported analysis of the situation and
a sound, defensible set of recommendations about which managerial actions need
to be taken.
To prepare a case for class discussion, we suggest the following approach:
1. Skim the case rather quickly to get an overview of the situation it presents. This
quick overview should give you the general flavor of the situation and indicate
the kinds of issues and problems that you will need to wrestle with. If your
instructor has provided you with study questions for the case, now is the time
to read them carefully.
2. Read the case thoroughly to digest the facts and circumstances. On this reading,
try to gain full command of the situation presented in the case. Begin to
develop some tentative answers to the study questions your instructor has
provided. If your instructor has elected not to give you assignment questions,
then start forming your own picture of the overall situation being described.
3. Carefully review all the information presented in the exhibits. Often, there is an
important story in the numbers contained in the exhibits. Expect the
information in the case exhibits to be crucial enough to materially affect your
diagnosis of the situation.
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4. Decide what the strategic issues are. Until you have identified the strategic
issues and problems in the case, you don’t know what to analyze, which tools
and analytical techniques are called for, or otherwise how to proceed. At times
the strategic issues are clear—either being stated in the case or else obvious
from reading the case. At other times you will have to dig them out from all
the information given; if so, the study questions will guide you.
5. Start your analysis of the issues with some number crunching. A big majority of
strategy cases call for some kind of number crunching—calculating assorted
financial ratios to check out the company’s financial condition and recent
performance, calculating growth rates of sales or profits or unit volume,
checking out profit margins and the makeup of the cost structure, and
understanding whatever revenue-cost-profit relationships are present. See
Table 1 for a summary of key financial ratios, how they are calculated, and
what they show.
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TABLE 1 Key Financial Ratios: How to Calculate Them and What They Mean
Ratio How Calculated
Profitability
ratios
1. Gross profit
margin
2. Operating
profit margin
(or
return on
sales)
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Ratio How Calculated
3. Net profit
margin (or
net return on
sales)
4. Total return
on assets
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Ratio How Calculated
5. Net return
on total
assets
(ROA)
6. Return on
stock
holder’s
equity
(ROE)
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Ratio How Calculated
Liquidity ratios
7. Return on
invested
capital
(ROIC)—
sometimes
referred to as
return on
capital
employed
(ROCE)
8. Earnings per
share (EPS)
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Ratio How Calculated
1. Current ratio
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Ratio How Calculated
Leverage ratios
2. Working
capital
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Ratio How Calculated
1. Total
debt-to-
assets
ratio
2. Long-term
debt-to-
capital ratio
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Ratio How Calculated
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Ratio How Calculated
3. Debt-to-
equity ratio
4. Long-term
debt-to-
equity ratio
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Ratio How Calculated
Activity ratios
5. Times-
interest-
earned (or
coverage)
ratio
1. Days of
inventory
2. Inventory
turnover
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Ratio How Calculated
Other important
measures of
financial
performance
3. Average
collection
period
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Ratio How Calculated
1. Dividend
yield on
common
stock
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Ratio How Calculated
2. Price-
earnings
ratio
3. Dividend
payout ratio
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Ratio How Calculated
4. Internal cash
flow
5. Free cash
flow
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Ratio How Calculated
6. Apply the concepts and techniques of strategic analysis you have been
studying. Strategic analysis is not just a collection of opinions; rather,
it entails applying the concepts and analytical tools described in Chapters 1
through 12 to cut beneath the surface and produce sharp insight and
understanding. Every case assigned is strategy related and presents you with an
opportunity to usefully apply what you have learned. Your instructor is looking
for you to demonstrate that you know how and when to use the material
presented in the text chapters.
7. Check out conflicting opinions and make some judgments about the validity of all
the data and information provided. Many times cases report views and
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As long as you are conscientious in preparing your analysis and recommendations,
and have ample reasons, evidence, and arguments to support your views, you
shouldn’t fret unduly about whether what you’ve prepared is “the right answer” to
the case. In case analysis, there is rarely just one right approach or set of
recommendations. Managing companies and crafting and executing strategies are
not such exact sciences that there exists a single provably correct analysis and
contradictory opinions (after all, people don’t always agree on things, and
different people see the same things in different ways). Forcing you to evaluate
the data and information presented in the case helps you develop your powers
of inference and judgment. Asking you to resolve conflicting information
“comes with the territory” because a great many managerial situations entail
opposing points of view, conflicting trends, and sketchy information.
8. Support your diagnosis and opinions with reasons and evidence. The most
important things to prepare for are your answers to the question “Why?” For
instance, if after studying the case you are of the opinion that the company’s
managers are doing a poor job, then it is your answer to “Why?” that
establishes just how good your analysis of the situation is. If your instructor
has provided you with specific study questions for the case, by all means
prepare answers that include all the reasons and number-crunching evidence
you can muster to support your diagnosis. If you are using study questions
provided by the instructor, generate at least two pages of notes!
9. Develop an appropriate action plan and set of recommendations. Diagnosis
divorced from corrective action is sterile. The test of a manager is always to
convert sound analysis into sound actions—actions that will produce the
desired results. Hence, the final and most telling step in preparing a case is to
develop an action agenda for management that lays out a set of specific
recommendations on what to do. Bear in mind that proposing realistic,
workable solutions is far preferable to casually tossing out off-the-top-of-your-
head suggestions. Be prepared to argue why your recommendations are more
attractive than other courses of action that are open.
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action plan for each strategic situation. Of course, some analyses and action plans
are better than others; but, in truth, there’s nearly always more than one good way
to analyze a situation and more than one good plan of action.
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Participating in Class Discussion of a Case
Classroom discussions of cases are sharply different from attending a lecture class.
In a case class, students do most of the talking. The instructor’s role is to solicit
student participation, keep the discussion on track, ask “Why?” often, offer
alternative views, play the devil’s advocate (if no students jump in to offer opposing
views), and otherwise lead the discussion. The students in the class carry the
burden for analyzing the situation and for being prepared to present and defend
their diagnoses and recommendations. Expect a classroom environment, therefore,
that calls for your size-up of the situation, your analysis, what actions you would
take, and why you would take them. Do not be dismayed if, as the class discussion
unfolds, some insightful things are said by your fellow classmates that you did not
think of. It is normal for views and analyses to differ and for the comments of
others in the class to expand your own thinking about the case. As the old adage
goes, “Two heads are better than one.” So it is to be expected that the class as a
whole will do a more penetrating and searching job of case analysis than will any
one person working alone. This is the power of group effort, and its virtues are that
it will help you see more analytical applications, let you test your analyses and
judgments against those of your peers, and force you to wrestle with differences of
opinion and approaches.
To orient you to the classroom environment on the days a case discussion
is scheduled, we compiled the following list of things to expect:
1. Expect the instructor to assume the role of extensive questioner and
listener.
2. Expect students to do most of the talking. The case method enlists a maximum
of individual participation in class discussion. It is not enough to be present as
a silent observer; if every student took this approach, there would be no
discussion. (Thus, expect a portion of your grade to be based on your
participation in case discussions.)
3. Be prepared for the instructor to probe for reasons and supporting analysis.
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There are several things you can do on your own to be good and look good as a
participant in
class discussions:
4. Expect and tolerate challenges to the views expressed. All students have to be
willing to submit their conclusions for scrutiny and rebuttal. Each student
needs to learn to state his or her views without fear of disapproval and to
overcome the hesitation of speaking out. Learning respect for the views and
approaches of others is an integral part of case analysis exercises. But there are
times when it is OK to swim against the tide of majority opinion. In the
practice of management, there is always room for originality and unorthodox
approaches. So while discussion of a case is a group process, there is no
compulsion for you or anyone else to cave in and conform to group opinions
and group consensus.
5. Don’t be surprised if you change your mind about some things as the
discussion unfolds. Be alert to how these changes affect your analysis and
recommendations (in the event you get called on).
6. Expect to learn a lot in class as the discussion of a case progresses;
furthermore, you will find that the cases build on one another—what you learn
in one case helps prepare you for the next case discussion.
Although you should do your own independent work and independent thinking,
don’t hesitate before (and after) class to discuss the case with other students. In
real life, managers often discuss the company’s problems and situation with
other people to refine their own thinking.
In participating in the discussion, make a conscious effort to contribute, rather
than just talk. There is a big difference between saying something that builds the
discussion and offering a long-winded, off-the-cuff remark that leaves the class
wondering what the point was.
Avoid the use of “I think,” “I believe,” and “I feel”; instead, say, “My analysis
shows _____” and “The company should do _____ because _____.” Always
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give supporting reasons and evidence for your views; then your instructor won’t
have to ask you “Why?” every time you make a comment.
In making your points, assume that everyone has read the case and knows what
it says. Avoid reciting and rehashing information in the case—instead, use the
data and information to explain your assessment of the situation and to support
your position.
Bring the printouts of the work you’ve done on Case-TUTOR or the notes you’ve
prepared (usually two or three pages’ worth) to class and rely on them
extensively when you speak. There’s no way you can remember everything off
the top of your head—especially the results of your number crunching. To reel
off the numbers or to present all five reasons why, instead of one, you will need
good notes. When you have prepared thoughtful answers to the study questions
and use them as the basis for your comments, everybody in the room will know
you are well prepared, and your contribution to the case discussion will stand
out.
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Preparing a Written Case Analysis
Preparing a written case analysis is much like preparing a case for class discussion,
except that your analysis must be more complete and put in report form.
Unfortunately, though, there is no ironclad procedure for doing a written case
analysis. All we can offer are some general guidelines and words of wisdom—this is
because company situations and management problems are so diverse that no one
mechanical way to approach a written case assignment always works.
Your instructor may assign you a specific topic around which to prepare your
written report. Or, alternatively, you may be asked to do a comprehensive written
case analysis, where the expectation is that you will (1) identify all the pertinent
issues that management needs to address, (2) perform whatever analysis and
evaluation is appropriate, and (3) propose an action plan and set of
recommendations addressing the issues you have identified. In going through the
exercise of identify, evaluate, and recommend, keep the following pointers in
mind.
Identification It is essential early on in your written report that you
provide a sharply focused diagnosis of strategic issues and key problems and that
you demonstrate a good grasp of the company’s present situation. Make sure you
can identify the firm’s strategy (use the concepts and tools in Chapters 1– 8
as diagnostic aids) and that you can pinpoint whatever strategy implementation
issues may exist (again, consult the material in Chapters 10– 12 for diagnostic
help). Consult the key points we have provided at the end of each chapter for
further diagnostic suggestions. Consider beginning your report with an overview of
the company’s situation, its strategy, and the significant problems and issues that
confront management. State problems/issues as clearly and precisely as you can.
Unless it is necessary to do so for emphasis, avoid recounting facts and history
about the company (assume your professor has read the case and is familiar with
the organization).
3
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Analysis and Evaluation This is usually the hardest part of the report. Analysis is
hard work! Check out the firm’s financial ratios, its profit margins and rates of
return, and its capital structure, and decide how strong the firm is financially.
Table 1 contains a summary of various financial ratios and how they are
calculated. Use it to assist in your financial diagnosis. Similarly, look at marketing,
production, managerial competence, and other factors underlying the
organization’s strategic successes and failures. Decide whether the firm has
valuable resource strengths and competencies and, if so, whether it is capitalizing
on them.
Check to see if the firm’s strategy is producing satisfactory results and determine
the reasons why or why not. Probe the nature and strength of the competitive
forces confronting the company. Decide whether and why the firm’s competitive
position is getting stronger or weaker. Use the tools and concepts you have learned
about to perform whatever analysis and evaluation is appropriate. Work through
the case preparation exercise on Case-TUTOR if one is available for the case you’ve
been assigned.
In writing your analysis and evaluation, bear in mind four things:
1. You are obliged to offer analysis and evidence to back up your conclusions. Do
not rely on unsupported opinions, over-generalizations, and platitudes as a
substitute for tight, logical argument backed up with facts and figures.
2. If your analysis involves some important quantitative calculations, use tables
and charts to pre-sent the calculations clearly and efficiently. Don’t just tack
the exhibits on at the end of your report and let the reader figure out what they
mean and why they were included. Instead, in the body of your report cite
some of the key numbers, highlight the conclusions to be drawn from the
exhibits, and refer the reader to your charts and exhibits for more details.
3. Demonstrate that you have command of the strategic concepts and analytical
tools to which you have been exposed. Use them in your report.
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Recommendations The final section of the written case analysis should consist of a
set of definite recommendations and a plan of action. Your set of
recommendations should address all of the problems/issues you identified and
analyzed. If the recommendations come as a surprise or do not follow logically
from the analysis, the effect is to weaken greatly your suggestions of what to do.
Obviously, your recommendations for actions should offer a reasonable prospect of
success. High-risk, bet-the-company recommendations should be made with
caution. State how your recommendations will solve the problems you identified.
Be sure the company is financially able to carry out what you recommend; also
check to see if your recommendations are workable in terms of acceptance by the
persons involved, the organization’s competence to implement them, and prevailing
market and environmental constraints. Try not to hedge or weasel on the actions
you believe should be taken.
By all means state your recommendations in sufficient detail to be meaningful—get
down to some definite nitty-gritty specifics. Avoid such unhelpful statements as
“the organization should do more planning” or “the company should be more
aggressive in marketing its product.” For instance, if you determine that “the firm
should improve its market position,” then you need to set forth exactly how you
think this should be done. Offer a definite agenda for action, stipulating a timetable
and sequence for initiating actions, indicating priorities, and suggesting who should
be responsible for doing what.
In proposing an action plan, remember there is a great deal of difference
between, on the one hand, being responsible for a decision that may be costly if it
4. Your interpretation of the evidence should be reasonable and objective. Be
wary of preparing a one-sided argument that omits all aspects not favorable to
your conclusions. Likewise, try not to exaggerate or overdramatize. Endeavor
to inject balance into your analysis and to avoid emotional rhetoric. Strike
phrases such as “I think,” “I feel,” and “I believe” when you edit your first draft
and write in “My analysis shows” instead.
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proves in error and, on the other hand, casually suggesting courses of action that
might be taken when you do not have to bear the responsibility for any of the
consequences.
A good rule to follow in making your recommendations is: Avoid recommending
anything you would not yourself be willing to do if you were in management’s
shoes. The importance of learning to develop good managerial judgment is
indicated by the fact that, even though the same information and operating data
may be available to every manager or executive in an organization, the quality of
the judgments about what the information means and which actions need to be
taken does vary from person to person.
It goes without saying that your report should be well organized and well written.
Great ideas amount to little unless others can be convinced of their merit—this
takes tight logic, the presentation of convincing evidence, and persuasively written
arguments.
4
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Preparing an Oral Presentation
During the course of your business career it is very likely that you will be called
upon to prepare and give a number of oral presentations. For this reason, it is
common in courses of this nature to assign cases for oral presentation to the whole
class. Such assignments give you an opportunity to hone your presentation skills.
The preparation of an oral presentation has much in common with that of a
written case analysis. Both require identification of the strategic issues and
problems confronting the company, analysis of industry conditions and the
company’s situation, and the development of a thorough, well-thought-out action
plan. The substance of your analysis and quality of your recommendations in an
oral presentation should be no different than in a written report. As with a written
assignment, you’ll need to demonstrate command of the relevant strategic concepts
and tools of analysis and your recommendations should contain sufficient detail to
provide clear direction for management. The main difference between an oral
presentation and a written case is in the delivery format. Oral presentations rely
principally on verbalizing your diagnosis, analysis, and recommendations and
visually enhancing and supporting your oral discussion with colorful, snappy slides
(usually created on Microsoft’s PowerPoint software).
Typically, oral presentations involve group assignments. Your instructor will
provide the details of the assignment—how work should be delegated among the
group members and how the presentation should be conducted. Some instructors
prefer that presentations begin with issue identification, followed by analysis of the
industry and company situation analysis, and conclude with a recommended action
plan to improve company performance. Other instructors prefer that the presenters
assume that the class has a good understanding of the external industry
environment and the company’s competitive position and expect the presentation
to be strongly focused on the group’s recommended action plan and supporting
analysis and arguments. The latter approach requires cutting straight to the heart of
the case and supporting each recommendation with detailed analysis and
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persuasive reasoning. Still other instructors may give you the latitude to structure
your presentation however you and your group members see fit.
Regardless of the style preferred by your instructor, you should take great care in
preparing for the presentation. A good set of slides with good content and good
visual appeal is essential to a first-rate presentation. Take some care to choose a
nice slide design, font size and style, and color scheme. We suggest including slides
covering each of the following areas:
You and your team members should carefully plan and rehearse your slide show to
maximize impact and minimize distractions. The slide show should include all of
the pizzazz necessary to garner the attention of the audience, but not so much that
it distracts from the content of what group members are saying to the class. You
should remember that the role of slides is to help you communicate your points to
the audience. Too many graphics, images, colors, and transitions may divert the
audience’s attention from what is being said or disrupt the flow of the presentation.
Keep in mind that visually dazzling slides rarely hide a shallow or superficial or
otherwise flawed case analysis from a perceptive audience. Most instructors will tell
you that first-rate slides will definitely enhance a well-delivered presentation, but
that impressive visual aids, if accompanied by weak analysis and poor oral delivery,
still add up to a substandard presentation.
An opening slide covering the “title” of the presentation and names of the
presenters.
A slide showing an outline of the presentation (perhaps with presenters’ names
by each topic).
One or more slides showing the key problems and strategic issues that
management
needs to address.
A series of slides covering your analysis of the company’s situation.
A series of slides containing your recommendations and the supporting
arguments and reasoning for each recommendation—one slide for each
recommendation and the associated reasoning will give it a lot of merit.
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Researching Companies and Industries via the Internet and
Online Data Services
Very likely, there will be occasions when you need to get additional information
about some of the assignee cases, perhaps because your instructor has asked you to
do further research on the industry or company or because you are simply curious
about what has happened to the company since the case was written. These days, it
is relatively easy to run down recent industry developments and to find out whether
a company’s strategic and financial situation has improved, deteriorated, or
changed little since the conclusion of the case. The amount of information about
companies and industries available on the Internet and through online data
services is formidable and expanding rapidly.
It is a fairly simple matter to go to company websites, click on the investor
information offerings and press release files, and get quickly to useful information.
Most company websites allow you to view or print the company’s quarterly and
annual reports, its 10-K and 10-Q filings with the Securities and Exchange
Commission, and various company press releases of interest. Frequently, a
company’s website will also provide information about its mission and vision
statements, values statements, codes of ethics, and strategy information, as well as
charts of the company’s stock price. The company’s recent press releases typically
contain reliable information about what of interest has been going on—new product
introductions, recent alliances and partnership agreements, recent acquisitions,
summaries of the latest financial results, tidbits about the company’s strategy,
guidance about future revenues and earnings, and other late-breaking company
developments. Some company web pages also include links to the home pages of
industry trade associations where you can find information about industry size,
growth, recent industry news, statistical trends, and future outlook. Thus, an early
step in researching a company on the Internet is always to go to its website and see
what’s available.
Online Data Services LexisNexis, Bloomberg Financial News Services, and other
online subscription services available in many university libraries provide access to
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a wide array of business reference material. For example, the web-based LexisNexis
Academic Universe contains business news articles from general news sources,
business publications, and industry trade publications. Broadcast transcripts from
financial news programs are also available through LexisNexis, as are full-text 10-
Ks, 10-Qs, annual reports, and company profiles for more than 11,000 U.S. and
international companies. Your business librarian should be able to direct you to the
resources available through your library that will aid you in your research.
Public and Subscription Websites with Good Information Plainly, you can use a
search engine such as Google or Yahoo! or MSN to find the latest news on a
company or articles written by reporters that have appeared in the business media.
These can be very valuable in running down information about recent company
developments. However, keep in mind that the information retrieved by a search
engine is “unfiltered” and may include sources that are not reliable or that contain
inaccurate or misleading information. Be wary of information provided by authors
who are unaffiliated with reputable organizations or publications and articles that
were published in off-beat sources or on websites with an agenda. Be especially
careful in relying on the accuracy of information you find posted on various
bulletin boards. Articles covering a company or issue should be copyrighted or
published by a reputable source. If you are turning in a paper containing
information gathered from the Internet, you should cite your sources (providing the
Internet address and date visited); it is also wise to print web pages for your
research file (some web pages are updated frequently).
The Wall Street Journal, Bloomberg Businessweek, Forbes, Barron’s, and
Fortune are all good sources of articles on companies. The online edition of The
Wall Street Journal contains the same information that is available daily in its print
version of the paper, but the WSJ website also maintains a searchable database of
all The Wall Street Journal articles published during the past few years. Fortune and
Bloomberg Businessweek also make the content of the most current issue available
online to subscribers as well as provide archives sections that allow you to search
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for articles published during the past few years that may be related to a particular
keyword.
The following publications and websites are particularly good sources of company
and industry information:
Securities and Exchange Commission EDGAR database (contains company 10-
Ks, 10-Qs, etc.)
http://www.sec.gov/edgar/searchedgar/companysearch
Google Finance
http://finance.google.com
CNN Money
http://money.cnn.com
Hoover’s Online
http://hoovers.com
The Wall Street Journal Interactive Edition
www.wsj.com
Bloomberg Businessweek
www.businessweek.com and www.bloomberg.com
Fortune
www.fortune.com
MSN Money Central
http://moneycentral.msn.com
Yahoo! Finance
http://finance.yahoo.com/
Some of these Internet sources require subscriptions in order to access their entire
databases.
You should always explore the investor relations section of every public company’s
website. In today’s world, these websites typically have a wealth of information
concerning a company’s mission, core values, performance targets, strategy, recent
http://www.sec.gov/edgar/searchedgar/companysearch
http://finance.google.com/
http://money.cnn.com/
http://www.hoovers.com/
http://www.wsj.com/
http://www.businessweek.com/
http://www.bloomberg.com/
http://www.fortune.com/
http://moneycentral.msn.com/
http://finance.yahoo.com/
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financial performance, and latest developments (as described in company press
releases).
Learning Comes Quickly With a modest investment of time, you will learn how to
use Internet sources and search engines to run down information on companies
and industries quickly and efficiently. And it is a skill that will serve you well into
the future. Once you become familiar with the data available at different websites
mentioned above and learn how to use a search engine, you will know where to go
to look for the particular information that you want. Search engines nearly always
turn up too many information sources that match your request rather than too few.
The trick is to learn to zero in on those most relevant to what you are looking for.
Like most things, once you get a little experience under your belt on how to do
company and industry research on the Internet, you will be able to readily find the
information you need.
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The Ten Commandments of Case Analysis
As a way of summarizing our suggestions about how to approach the task of case
analysis, we have put together what we like to call “The Ten Commandments of
Case Analysis.” They are shown in Table 2. If you observe all or even most of
these commandments faithfully as you prepare a case either for class discussion or
for a written report, your chances of doing a good job on the assigned cases will be
much improved. Hang in there, give it your best shot, and have some fun exploring
what the real world of strategic management is all about.
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TABLE 2 The Ten Commandments of Case Analysis
To be observed in written reports and oral presentations, and while participating in
class discussions:
1. Go through the case twice, once for a quick overview and once to gain full
command of the facts. Then take care to explore the information in every one of the
case exhibits.
2. Make a complete list of the problems and issues that the company’s management
needs to address.
3. Be thorough in your analysis of the company’s situation (make a minimum of one to
two pages of notes detailing your diagnosis).
4. Look for opportunities to apply the concepts and analytical tools in the text
chapters—all of the cases in the book have very definite ties to the material in one or
more of the text chapters!!!!
5. Do enough number crunching to discover the story told by the data presented in the
case. (To help you comply with this commandment, consult Table 1 in this
section to guide your probing of a company’s financial condition and financial
performance.)
6. Support any and all off-the-cuff opinions with well-reasoned arguments and
numerical evidence. Don’t stop until you can purge “I think” and “I feel” from your
assessment and, instead, are able to rely completely on “My analysis shows.”
7. Prioritize your recommendations and make sure they can be carried out in an
acceptable time frame with the available resources.
8. Support each recommendation with persuasive argument and reasons as to why it
makes sense and should result in improved company performance.
9. Review your recommended action plan to see if it addresses all of the problems and
issues you identified. Any set of recommendations that does not address all of the
issues and problems you identified is incomplete and insufficient.
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10. Avoid recommending any course of action that could have disastrous consequences
if it doesn’t work out as planned. Therefore, be as alert to the downside risks of your
recommendations as you are to their upside potential and appeal.
2/8/22, 3:04 PM Introduction
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CASE 7
lululemon athletica’s Strategy in
2020: Is the Recent Growth in
Retail Stores, Revenues, and
Profitability Sustainable?
Arthur A. Thompson
The University of Alabama
Randall D. Harris
Texas A&M University-Corpus Christi
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In May 2020, shareholders of lululemon athletica—a designer and retailer of high-
tech athletic apparel sold under the lululemon athletica and ivivva athletica brand
names—were highly pleased with the remarkable turnaround in the company’s
performance since January 2016. Calvin McDonald, who became the company’s
CEO in August 2018, had proven highly adept in continuing to grow the company
and boost its profitability somewhat faster than his predecessor had done during
2016 and 2017. Since the end of fiscal 2016 on January 31, 2016, lululemon’s
revenues had almost doubled and net profits were up 243 percent. The number of
company-operated stores had increased from 368 stores in 9 countries in February
2016 to 491 stores in 17 countries as of February 2020, and the company’s stock
price had risen from $60.75 in early February 2016 to an all-time high of $343.74 in
early August 2020. Average annual sales at lululemon’s retail stores open at least 12
months, which had dropped from a record high of $5.83 million per store in 2012
to $4.57 million in 2015 (a 21.6 percent decline), had climbed back to $5.2 million
in fiscal 2020, ending February 2, 2020, while online sales rose from $401 million
in the fiscal year ending January 31, 2016, to $1.14 billion in the fiscal year ending
February 2, 2020.
Going into June 2020, the question lurking for shareholders, given the falloff in
retail store sales and customer traffic that most apparel chain retailers were
struggling to overcome not only during the peak months of the COVID-19
pandemic but also from the propensity of many buyers to shift their purchases of
apparel and other products online, was how much longer lululemon would be able
to sustain its recent rates of growth in retail stores, revenues, and profitability.
2
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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 give him 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
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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 yoga, 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 operations in the United States. 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 operating 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
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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’ experience at Reebok and was Reebok’s CEO from 1996–1999,
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.
Brisk expansion ensued. The company ended fiscal 2006 with 41 company-owned
stores, 10 franchised stores, net revenues of $149 million, and net income of $7.7
million. In 2007, the company’s owners elected to take the company public. The
initial public offering took place on August 2, 2007, with the company selling
2,290,909 shares to the public and various stockholders selling 15,909,091 shares
of their personal holdings. Shares began trading on the NASDAQ under the
symbol LULU and on the Toronto Exchange under the symbol LLL.
In 2007, the company’s announced growth strategy had five key elements:
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The company grew rapidly. Fitness-conscious women began flocking to the
company’s stores not only because of the fashionable products but also because of
the store ambience and attentive, knowledgeable store personnel. Dozens of new
lululemon athletic retail stores were opened annually, and the company pursued a
strategy of embellishing its product offerings to create a comprehensive line of
apparel and accessories designed for athletic pursuits such as yoga; running and
1. Grow the company’s store base in North America. The strategic objective was to
add new stores to strengthen the company’s presence in locations where it had
existing stores and then selectively enter new geographic markets in the United
States and Canada. Management believed that the company’s strong sales in
U.S. stores demonstrated the portability of the lululemon brand and retail
concept.
2. Increase brand awareness. This initiative entailed leveraging the
publicity surrounding the opening of new stores with grassroots
marketing programs that included organizing events and partnering with local
fitness practitioners.
3. Introduce new product technologies. Management intended to continue to focus
on developing and offering products that incorporated technology-enhanced
fabrics and performance features that differentiated lululemon apparel and
helped broaden the company’s customer base.
4. Broaden the appeal of lululemon products. This initiative entailed (1) adding a
number of apparel items for men, (2) expanding product offerings for women
and young females in such categories as athletic bags, undergarments,
outerwear, and sandals, and (3) adding products suitable for additional sports
and athletic activities.
5. Expand beyond North America. In the near term, the company planned to
expand its presence in Australia and Japan and then, over time, pursue
opportunities in other Asian and European markets that offered similar,
attractive demogr1aphics.
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general fitness; technical clothing for active female youths; and a selection of fitness
and recreational items for men. Revenues topped $1 billion in fiscal 2011, $2
billion fiscal 2016, and $3 billion in fiscal 2018.
For fiscal year 2019, lululemon revenues grew by 21 percent over fiscal 2018 to just
under $4 billion. lululemon products could be bought at its 368 retail stores in the
United States and Canada, 38 stores in the People’s Republic of China, 38 stores in
Australia and New Zealand, and 47 stores in the rest of the world. The company’s
e-commerce web site, www.lululemon.com, was available to customers worldwide. In
the company’s most recent fiscal year ending February 2, 2020, retail store sales
accounted for 62.8 percent of company revenues, web site sales accounted for 28.6
percent, and sales in all other channels (sales at outlet centers, showroom sales,
sales from temporary locations, licensing revenues, and wholesale sales to premium
yoga studios, health clubs, fitness centers, and a few other retailers) accounted for
8.6 percent.
Exhibit 1 presents highlights of the company’s performance for fiscal years
2015–2019. Exhibit 2 shows lululemon’s revenues by business segment and
geographic region for the same period.
http://www.lululemon.com/
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EXHIBIT 1 Financial and Operating Highlights, lululemon athletica, Fiscal Years 2
2019 (in millions of $, except per share data)
Selected
Income
Statement
Data
Fiscal
Year 2019
(Ending
Feb. 2,
2020)
Fiscal Year
2018(Ending
Feb. 3,
2019)
Fiscal Year
2017(Ending
Jan.28,2018)
Fiscal
Year
2016
(Ending
Jan 29,
2017)
Fiscal
2015(E
Jan.
201
Net revenues $3,979.3 $3,288.3 $2,649.2 $2,344.4 $2,06
Cost of goods sold 1,755.9 1,472.0 1,250.4 1,144.7 1,06
Gross profit 2,223.4 1,816.3 1,398.8 1,199.6 99
Selling, general,
and administrative
expenses
1,334.3 1,110.5 904.3 778.5 62
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Selected
Income
Statement Data
Fiscal
Year 2019
(Ending
Feb. 2,
2020)
Fiscal Year
2018(Ending
Feb. 3,
2019)
Fiscal Year
2017(Ending
Jan.28,2018)
Fiscal
Year
2016
(Ending
Jan 29,
2017)
Fiscal
2015(E
Jan.
201
Operating profit 889.1 705.8 456.0 421.2 36
Net profit (loss) $ 645.6 $ 483.8 $ 258.7 $ 303.4 $ 2
Foreign currency
translation
adjustment
(7.8) (73.9) 58.6 36.7 (6
Comprehensive
income
$ 637.8 $ 409.9 $ 317.2 $ 340.1 $ 2
Earnings per
share—basic
$ 4.95 $ 3.63 $ 1.90 $ 2.21 $
—diluted $ 4.93 $ 3.61 $ 1.90 $ 2.21 $
Balance Sheet
Data
Cash and cash
equivalents
$1,093.5 $ 881.3 $ 990.5 $ 734.8 $ 5
Inventories 518.5 404.8 329.6 298.4 28
Total assets 3,281.4 2,084.7 1,998.5 1,657.5 1,3
Stockholders’
equity
1,952.2 1,446.0 1, 597.0 1,360.0 1,02
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Selected
Income
Statement Data
Fiscal
Year 2019
(Ending
Feb. 2,
2020)
Fiscal Year
2018(Ending
Feb. 3,
2019)
Fiscal Year
2017(Ending
Jan.28,2018)
Fiscal
Year
2016
(Ending
Jan 29,
2017)
Fiscal
2015(E
Jan.
201
Cash Flow and
Other Data
Net cash provided
by operating
activities
$ 669.3 $ 742.8 $ 489.3 $ 385.1 $ 2
Capital
expenditures
283.1 225.8 157.9 149.5 14
Store Data
Number of
corporate-owned
stores open at end
of period
491 440 404 406
Sales per gross
square foot at
corporate-owned
stores open at
least one full year
$ 1,657 $ 1,579 $ 1,554 $ 1,521 $ 1
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Selected
Income
Statement Data
Fiscal
Year 2019
(Ending
Feb. 2,
2020)
Fiscal Year
2018(Ending
Feb. 3,
2019)
Fiscal Year
2017(Ending
Jan.28,2018)
Fiscal
Year
2016
(Ending
Jan 29,
2017)
Fiscal
2015(E
Jan.
201
Average sales at
corporate-owned
stores open at
least one year
$5.18
million
$4.78 million $4.68 million $4.47
million
$4.57 m
Source: Company 10-K reports for fiscal years 2015, 2016, 2017, 2018, and 2019.
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EXHIBIT 2 lululemon athletica’s Revenues and Income from Operations, by
Business Segment, Geographic Region, and Product Category.
Fiscal Years 2015–2019 (dollars in millions)
Revenues by
Business
Segment
Fiscal
Year
2019
(Ending
Feb. 2,
2020)
Fiscal
Year
2018
(Ending
Feb. 3,
2019)
Fiscal
Year
2017
(Ending
Jan.28,
2018)
Fiscal
Year
2016
(Ending
Jan 29,
2017
Fiscal
Year
2015
(Ending
Jan. 31
2016)
Corporate-owned
stores
$2,501.1 $2,126.4 $1,837.1 $1,704.4 $1,516.3
Direct-to-consumer
(e-commerce sales)
1,137.8 858.9 577.6 453.3 401.5
All other channels* 340.4 303.1 234.5 186.7 142.7
Total $3,979.3 $3,288.3 $2,649.2 $2,344.4 $2,060.5
Percentage
Distribution of
Revenues by Business
Segment
Corporate owned
stores
62.9% 64.7% 69.3% 72.7% 73.6%
Direct-to-consumer
(e-commerce sales)
28.6% 26.1% 21.8% 19.3% 19.5%
All other channels* 8.5% 9.2% 8.9% 8.0% 6.9%
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Revenues by
Business
Segment
Fiscal
Year
2019
(Ending
Feb. 2,
2020)
Fiscal
Year
2018
(Ending
Feb. 3,
2019)
Fiscal
Year
2017
(Ending
Jan.28,
2018)
Fiscal
Year
2016
(Ending
Jan 29,
2017
Fiscal
Year
2015
(Ending
Jan. 31
2016)
Total 100.0% 100.0% 100.0% 100.0% 100.0%
Income
from
Operations (before
general
corporate
expenses), by
Business Segment
Corporate owned
stores
$ 689.3 $ 575.5 $ 464.3 $ 415.6 $ 346.8
Direct-to-consumer
(e-commerce sales)
482.4 354.1 224.1 186.2 166.4
All other channels* 72.6 62.6 35.6 22.3 5.8
Total Income
from
Operations
(before general
corporate
expenses)
$1,244.3 $992.2 $724.0 $624.1 $519.0
Revenues by
Geographic Region
United States $2,854.4 $2,363.4 $1,911.8 $1,726.1 $1,508.8
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Revenues by
Business
Segment
Fiscal
Year
2019
(Ending
Feb. 2,
2020)
Fiscal
Year
2018
(Ending
Feb. 3,
2019)
Fiscal
Year
2017
(Ending
Jan.28,
2018)
Fiscal
Year
2016
(Ending
Jan 29,
2017
Fiscal
Year
2015
(Ending
Jan. 31
2016)
Canada 649.1 565.1 491.8 447.2 416.5
Outside of North
America
475.8 359.8 245.6 171.1 135.2
Total $3,979.3 $3,288.3 $2,649.2 $2,344.4 $2,060.5
Percentage
Distribution of
Revenues by
Geographic Region
United States 71.7% 71.9% 72.2% 73.6% 73.2%
Canada 16.3% 17.2% 18.6% 19.1% 20.2%
Outside of North
America
12.0% 10.9% 9.2% 7.3% 6.6%
Total 100.0% 100.0% 100.0% 100.0% 100.0%
Revenues by Product
Category
Women’s products $2,791.0 $2,352.8 $1,892.6
Not
reported
Not
reported
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Revenues by
Business
Segment
Fiscal
Year
2019
(Ending
Feb. 2,
2020)
Fiscal
Year
2018
(Ending
Feb. 3,
2019)
Fiscal
Year
2017
(Ending
Jan.28,
2018)
Fiscal
Year
2016
(Ending
Jan 29,
2017
Fiscal
Year
2015
(Ending
Jan. 31
2016)
Men’s products 933.8 694.9 526.5 Not
reported
Not
reported
Other categories 254.5 240.6 230.0 Not
reported
Not
reported
*The “All other channels” category included showroom sales, sales at lululemon outlet stores, sales from
temporary store locations, licensing revenues, and wholesale sales to premium yoga studios, health clubs, fitness
centers, and other wholesale accounts.
Source: Company 10-K Reports, Fiscal Years, 2017 and 2019.
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lululemon’s Evolving Senior Leadership Team
In January 2008, Christine M. Day joined the company as Executive Vice
President, Retail Operations. Previously, she had worked at Starbucks, functioning
in a variety of capacities and positions, including President, Asia Pacific Group
(July 2004- February 2007); Co-President for Starbucks Coffee International (July
2003 to October 2003); Senior Vice President, North American Finance &
Administration; and Vice President of Sales and Operations for Business Alliances.
In April 2008, Day was appointed as lululemon’s President and Chief Operating
Officer and was named Chief Executive Officer and member of the Board of
Directors in July 2008. During her tenure as CEO, Day expanded and strengthened
the company’s management team to support its expanding operating activities and
geographic scope, favoring the addition of people with relevant backgrounds and
experiences at such companies as Nike, Abercrombie & Fitch, The Gap, and
Speedo International. She also spent a number of hours each week in the
company’s stores observing how customers shopped, listening to their comments
and complaints, and using the information to tweak product offerings,
merchandising, and store operations.
Company founder Chip Wilson stepped down from his executive role as
lululemon’s Chief Innovation and Branding Officer effective January 29, 2012, and
moved his family to Australia; however, he continued on in his role of Chairman of
the company’s Board of Directors and focused on becoming a better Board
Chairman, even going so far as to take a four-day course on board-governance at
Northwestern University. Christine Day promoted Sheree Waterson, who had
joined the company in 2008 and had over 25 years of consumer and retail industry
experience, as Chief Product Officer to assume responsibility for product design,
product development, and other executive tasks that Wilson had been performing.
Shortly after the quality problems with the black Luon bottoms occurred, Sheree
Waterson resigned her position and left the company. In October 2013, lululemon
announced that Tara Poseley had been appointed to its Senior Leadership Team as
Chief Product Officer and would have responsibility for overseeing lululemon’s
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design team, product design activities, merchandising, inventory activities, and
strategic planning. Previously, Poseley held the position of Interim President at
Bebe Stores, Inc, President of Disney Stores North America (The Children’s
Place), CEO of Design Within Reach (DWR), and a range of senior merchandising
and design management positions during her 15-year tenure at Gap Inc.
In the aftermath of the pants recall in March 2013, the working
relationship between Christine Day and Chip Wilson deteriorated. Wilson made it
clear that he would have handled the product recall incident differently and that he
did not think there were problems with the design of the product or the quality of
the fabric. But the differences between Day and Wilson went beyond the events of
March 2013, especially when some consumers began to complain about the quality
of the replacement pants. Wilson returned from Australia in May 2013, and weeks
later Christine Day announced she would step down as CEO when her successor
was named. A lengthy search for Day’s replacement ensued.
In the meantime, Chip Wilson triggered a firestorm when, in an interview with
Bloomberg TV in November 2013, he defended the company’s design of the black
Luon bottoms, saying “Quite frankly, some women’s bodies just actually don’t
work” with the pants. Although a few days later he publicly apologized for his
remarks suggesting that the company’s product quality issues back in March 2013
were actually the fault of overweight women, his apology was not well received. In
December 2013, Wilson resigned his position as Chairman of lululemon’s board of
directors and took on the lesser role of non-executive Chairman. A few months
later, Wilson announced that he intended to give up his position as non-executive
Chairman prior to the company’s annual stockholders meeting in June 2014 but
continue on as a member of the company’s Board of Directors (in 2013–2014,
Wilson was the company’s largest stockholder and controlled 29.2 percent of the
company’s common stock).
In early December 2013, lululemon announced that its Board of Directors had
appointed Laurent Potdevin as the company’s Chief Executive Officer and a
member of its Board of Directors; Potdevin stepped into his role in January 2014,
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and, to help ensure a smooth transition, Christine Day remained with lululemon
through the end of the company’s fiscal year (February 2, 2014). Potdevin came to
lululemon having most recently served as President of TOMS Shoes, a company
founded on the mission that it would match every pair of shoes purchased with a
pair of new shoes given to a child in need. Prior to TOMS, Potdevin held numerous
positions at Burton Snowboards for more than 15 years, including President and
CEO from 2005–2010; Burton Snowboards, headquartered in Burlington,
Vermont, was considered to be the world’s premier snowboard company, with a
product line that included snowboards and accessories (bindings, boots, socks,
gloves, mitts, and beanies); men’s, women’s, and youth snowboarding apparel; and
bags and luggage. Burton’s grew significantly under Potdevin’s leadership,
expanding across product categories and opening additional retail stores.
Tension between Chip Wilson and lululemon’s board of directors erupted at the
company’s annual shareholders’ meeting in June 2014 when he voted his entire
shares against re-election of the company’s chairman and another director. In
February 2015, after continuing to disagree with lululemon executives and board
members over the company’s strategic direction and ongoing dissatisfaction with
how certain lululemon activities were being managed, Wilson resigned his position
on lululemon’s board of directors. In August 2014, he sold half of his ownership
stake to a private equity firm. In June 2015, lululemon filed documents with the
Securities and Exchange Commission enabling Wilson to sell his remaining 20.1
million shares (equal to a 14.6 percent ownership stake worth about $1.3 billion) in
the event he wished to do so. As of April 2020, Chip Wilson owned 10.7 million
shares of lululemon’s common stock, equal to an ownership stake of about 8.1
percent. Wilson, together with his wife and son, in 2014 formed a new company,
Kit and Ace, that specialized in high-end clothing for men and women made from a
machine-washable, high performance, cashmere fabric; the innovative clothing line
was designed for all-day wear and included a range of items suitable for running
errands or attending an evening event. In 2016, there were some 60 Kit and Ace
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stores in the United States, Canada, Australia, Britain, and Japan; however, in
2020, the company only had 8 locations, all in Canada.
In 2018, lululemon CEO Laurent Potdevin resigned as CEO following allegations
of misconduct. Potdevin was replaced by Calvin McDonald as Chief Executive
Officer in August 2018. McDonald had previously served for five years as the
President and CEO of Sephora America, a division of the LVMH Group. Mr.
McDonald had been very successful in his previous position, a period during which
Sephora America grew annually by double digits. McDonald was also an
endurance athlete who had competed in both triathlons and marathons. In April
2020, the Chief Financial Officer (CFO) for lululemon, Patrick Guido, resigned as
CFO. Guido had not been replaced as of June 17, 2020.
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4
THE YOGA MARKETPLACE
According to the most recent study on the practice of yoga in the United
States, a “Yoga in America” study funded by the Yoga Journal, in 201
5
there were 36.7 million people in the United States who had practiced yoga in the
last six months in a group or private class setting, up from 20.4 million in 2012 and
15.8 million in 2008. Worldwide, it was estimated that were about 300 million
yoga practitioners. About 72 percent of the people who engaged in group or class
yoga exercises were women, and close to 62 percent of all yoga practitioners were
in the age range of 18–49. The level of yoga expertise varied considerably: 56
percent of yoga practitioners considered themselves as beginners, 42 percent
considered themselves as “intermediate,” and two percent considered themselves to
be in the expert/advanced category. Spending on yoga classes, yoga apparel,
equipment, and accessories was an estimated $16.8 billion, up from $10.3 billion in
2012, and $5.7 billion in 2008.
The market for sports and fitness apparel was considerably larger, of course, than
just the market for yoga apparel. The global market for all types of sportswear,
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activewear, and athletic apparel was estimated to be about $250 billion in 2020 and
was forecast to grow at roughly five percent annually through 2026. Sales of
various types of sports apparel was among the fastest-growing segments in the $3
trillion global apparel market. In the United States, sales of activewear and all types
of gym and fitness apparel, which included both items made with high-tech
performance fabrics that wicked away moisture and items made mostly of cotton,
polyester, stretch fabrics, and selected other manmade fibers that lacked moisture-
wicking and other high performance features, were the fastest growing segment of
the apparel industry.
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LULULEMON’S STRATEGY AND BUSINESS IN 2020
Lululemon athletica viewed its core mission as “creating components for people to
live longer, healthier, fun lives.” The company’s primary target customer was
“a sophisticated and educated woman who understands the importance of an
active, healthy lifestyle. She is increasingly tasked with the dual responsibilities of
career and family and is constantly challenged to balance her work, life and
health. We believe she pursues exercise to achieve physical fitness and inner
peace.”
In the company’s early years, lululemon’s strategy was predicated on management’s
belief that other athletic apparel companies were not effectively addressing the
unique style, fit and performance needs of women who were embracing yoga and a
variety of other fitness and athletic activities. Lululemon sought to address this
void in the marketplace by incorporating style, feel-good comfort, and functionality
into its yoga-inspired apparel products and by building a network of lululemon
retail stores, along with an online store at the company’s website, to market its
apparel directly to these women. However, while the company was founded to
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address the unique needs and preferences of women, it did not take long for
management to recognize the merits of broadening the company’s market target to
include fitness apparel for activities other than yoga and apparel for population
segments other than adult women.
In 2009, lululemon opened its first ivviva-branded store in Vancouver, British
Columbia, to sell high quality, premium-priced dance-inspired apparel to female
youth (ivviva was a word that lululemon made up). The Vancouver store was soon
profitable, and
11
additional company-owned ivviva stores were opened in Canada
and the United States during 2010–13. In 20
14
–15, the opening of new ivviva stores
accelerated. However, in June 2019, lululemon announced the closure of all but
seven of the company’s ivviva stores. Sales of many ivviva branded products were
moved online to the lululemon website, and sales of some ivviva products
continued through other retailers, including Target and Amazon.com. In September
2019, lululemon announced it would close the seven remaining ivviva stores by
mid-
2020.
In 2013–14, the company began designing and marketing products for men who
appreciated the technical rigor and premium quality of athletic and fitness
apparel.
Management also believed that participation in athletic and fitness activities was
destined to climb as people over 60 years of age became increasingly focused on
living longer, healthier, active lives in their retirement years and engaged in regular
exercise and recreational activities. Another demand-enhancing factor was that
consumer decisions to purchase athletic, fitness, and recreational apparel were
being driven not only by an actual need for functional products but also by a desire
to create a particular lifestyle perception through the apparel they wore.
Consequently, senior executives had transitioned lululemon’s strategy from one of
focusing exclusively on yoga apparel for women to one aimed at designing and
marketing a wider range of healthy lifestyle-inspired apparel and accessories for
women and men and dance-inspired apparel for girls. In 2019, men’s product lines
became a major focus of growth for the company.
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In early 2019, lululemon announced a new five-year “Power of Three” strategic plan
featuring three growth initiatives:
Product Innovation. The company sought to pursue a disruptive innovation
strategy in its core apparel markets, using what management called a Science of
Feel™ approach to product development that emphasized using fabrics and
technologies that provided both excellent technical performance and feel-good
comfort, to introduce new products with innovative features and maintain a
fresh and growing lineup of yoga, running, and training products for both
women and men. The plan also called for the company to continue its product
collaborations, expand its popular Office/Travel/Commute line, and pursue new
opportunities such as selfcare.
Omni Guest Experiences. The company sought to become “an experiential
brand” and use all of the company’s marketing channels to grow and deepen its
relationship with the guests who patronized its stores and the consumers who
shopped its website, and, further, to create a series of ongoing experiential
moments and opportunities where local community members striving to live the
“sweatlife” and lead a healthy, mindful lifestyle could connect and come
together. The company’s concept of integrated “omni guest experiences” thus
went beyond just the experiences customers had in shopping, purchasing, and
using the company products to include creating and hosting a variety of local
community events, an innovative membership program, partnerships with local
yoga studios and running clubs, and unique store formats (like a 25,000 square-
foot store in Chicago which had a yoga studio, meditation space, a healthy food
and juice bar, and areas for community gatherings). In addition, management
intended for the company’s digital ecosystem to become a greater source of
information and communication and a means of inspiring and igniting
community building.
Continuing to Add lululemon Retail Stores in Both Its Core North American
Market and Internationally. Outside North America, China was the company’s
primary focus for new store openings, with 16 new stores added in the 2019
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lululemon reported significant progress on its strategic goals in early 2020, stating
that the company’s performance was on track to achieve its five-year strategic plan
goals to double online sales, double sales of men’s products, and quadruple
international revenues by year-end 2023 and was well-ahead of its previously set
target to reach $4 billion in annual revenue in fiscal 2020.
fiscal year and more planned for 2020. One to two new company-operated
stores were being opened in several countries across Europe (notably in the
United Kingdom, France, Germany, the Netherlands, and the Scandinavian
countries), and in selected countries in the Asia-Pacific (Australia, Japan,
Malaysia, Singapore, and South Korea).
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Product Line Strategy
In 2020, lululemon offered a diverse and growing selection of premium-priced
performance apparel and accessories for women, female youths and men that were
designed for healthy lifestyle activities such as yoga, swimming, running, cycling,
and general fitness. Currently, the company’s range of offerings included:
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If you are not familiar with lululemon products, it would be useful to spend a few
minutes browsing the company’s e-store at www.lululemon.com.
lululemon’s Strategy of Offering Only a Limited Range of Apparel Sizes.
In the months following the product recall of the too-sheer bottom pants in March
2013, lululemon officially revealed in a posting on its Facebook page that it did not
offer clothing in plus-sizes because focusing on sizes
12
and below was an integral
part of its business strategy; according to the company’s posting and to the
EXHIBIT 3 lululemon athletica’s Product Offerings for Women and Men,
Representative Sample, 2020
Women Men
Sports bras
Tanks
Sweaters and wraps
Jackets and hoodies
Long-sleeve and short-sleeve
tops and tees
Pants and crops
Shorts
Skirts and dresses
Outerwear
Swimwear
Socks and
underwear
Scarves
Gear bags
Caps and
headbands
Sweat cuffs and
gloves
Water bottles
Yoga mats and
props
Instructional
yoga DVDs
Tops
Jackets and hoodies
Pants and shorts
Gear bags and backpacks
Caps and gloves
Swimwear
Socks and underwear
Run accessories
Yoga mats, props, and
instructional DVDs
http://www.lululemon.com/
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postings of lululemon personnel who responded to comments made by Facebook
members who read the lululemon posting:
Our product and design strategy is built around creating products for our
target guest in our size range of 2–12. While we know that doesn’t work for
everyone and recognize fitness and health come in all shapes and sizes, we’ve
built our business, brand and relationship with our guests on this formula.
We agree that a beautiful healthy life is not measured by the size you wear. We
want to be excellent at what we do, so this means that we can’t be everything to
everybody and need to focus on specific areas. Our current focuses are in
innovating our women’s design, men’s brand, and building our international
market.
At this time, we don’t have plans to change our current sizing structure which is
2–12 for women.
In 2016, the largest size appearing in the size guide for women on lululemon’s
website was 12, which was said to be suitable for a 40” bust, 32.5” waist, and 43”
hips. In 2020, the largest women’s size appearing on the company’s website was 14
(but size 12 was the largest offered for most products). Some women’s products
were offered in sizes ranging from XXXS (for a 21” waist, 29” bust, and 32” hips)
to XXL (for a 35” waist, 42” bust, and 45” hips), but most such products were
sized XS to XL.
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Retail Distribution and Store Expansion Strategy
After several years of experience in establishing and working with franchised stores
in the United States, Australia, Japan, and Canada, top management in 2010
determined that having franchised stores was not in lululemon’s best long-term
strategic interests. A strategic initiative was begun to either acquire the current
stores of franchisees and operate them as company stores or convert the franchised
stores to a joint venture arrangement where lululemon owned the controlling
interest in the store and the former franchisee owned a minority interest. By year-
end 2011, all lululemon stores were company-operated.
As of February 2020, lululemon had 491 company-operated stores in 17 countries:
In fiscal year 2020, management had announced that in new store openings would
come primarily from company-operated store openings in Asia and the United
States. Management reported that the company’s real estate strategy going forward
would be to focus on (1) the opening of new company-operated stores, and (2)
expansion of the company’s overall retail square footage through store expansions
and store relocations. With sales per square foot of $1,657 in lululemon retail
305 stores in the United States (including 19 factory outlet stores in discount
malls).
63 stores in Canada, including seven ivviva stores slated for closure later on in
2020.
38 stores in the People’s Republic of China, inclusive of six stores in Hong
Kong, two stores in Macau, and one store in Taiwan.
31 stores in Australia.
14 stores in the United Kingdom.
Seven stores in Japan, seven stores in New Zealand, six stores in Germany, five
stores in South Korea, four stores in Singapore, three stores in France, two
stores in Malaysia, two stores in Sweden, and one store in each of the
Netherlands, Ireland, Norway, and Switzerland.
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stores in fiscal 2019, management believed its sales revenues per square foot of
retail space were close to the best in the retail apparel sector. By way of
comparison, the stores of specialty fashion retailers like Old Navy, Banana
Republic, The Gap, and Abercrombie & Fitch typically had 2015 annual sales
averaging less than $500 per square foot of store space.
lululemon’s Retail Stores: Locations, Layout, and Merchandising. The
company’s retail stores were located primarily on street locations, in upscale strip
shopping centers, in lifestyle centers, and in malls. Typically, stores were leased and
ranged from 2,500 to 3,500 square feet in size. Most stores included space for
product display and merchandising, checkout, fitting rooms, a restroom, and an
office/storage area. While the leased nature of the store spaces meant that each
store had its own customized layout and arrangement of fixtures and displays, each
store was carefully decorated and laid out in a manner that projected the ambience
and feel of a homespun local apparel boutique rather than the more impersonal,
cookie-cutter atmosphere of many apparel chain stores.
The company’s merchandising strategy was to sell all of the items in its retail stores
at full price. Special colors and seasonal items were in stores for only a limited
time—such products were on 3, 6, or 12-week life cycles so that frequent shoppers
could always find something new. Store inventories of short-cycle products were
deliberately limited to help foster a sense of scarcity, condition customers to buy
when they saw an item rather than wait, and avoid any need to discount unsold
items. In one instance, a hot-pink color that launched in December was supposed
to have a two-month shelf life, but supplies sold out in the first week. However,
supplies of core products that did not change much from season to season were
more ample to minimize the risk of lost sales due to items being out-of-stock.
Approximately 95 percent of the merchandise in lululemon stores was sold at full
price. When certain styles, colors, and sizes of apparel items at lululemon retail
stores were selling too slowly to clear out the inventories of items ordered from
contract manufacturers, lululemon typically shipped the excess inventories to one
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or more of the 19 lululemon Factory Outlet stores in North America to be sold at
discounted prices.
One unique feature of lululemon’s retail stores was that the floor space allocated to
merchandising displays and customer shopping could be sufficiently cleared to
enable the store to hold an in-store yoga class before or after regular shopping
hours. Every store hosted a complimentary yoga class each week that was
conducted by a professional yoga instructor from the local community who had
been recruited to be a “store ambassador;” when the class concluded, the attendees
were given a 15 percent-off coupon to use in shopping for products in the store.
From time to time, each store’s yoga ambassadors demonstrated their moves in the
store windows and on the sales floor. Exhibit 4 shows the exteriors and interiors
of representative lululemon athletica stores.
lululemon’s Showroom Strategy. Over the years, lululemon had opened
“showrooms” in numerous locations both inside and outside North America as a
means of introducing the lululemon brand and culture to a community, developing
relationships with local fitness instructors and fitness enthusiasts, and hosting
community-related fitness events, all in preparation for the grand opening of a new
lululemon athletica retail store in weeks ahead. Showroom personnel:
Showrooms were only open part of the week so that showroom personnel could be
out in the community meeting people, building relationships with yoga and fitness
instructors, participating in local yoga and fitness classes and talking with
Hosted get-acquainted parties for fitness instructors and fitness enthusiasts.
Recruited a few well-regarded fitness instructors in the local area to be “store
ambassadors” for lululemon products and periodically conduct in-store yoga
classes when the local lululemon retail store opened.
Advised people visiting the showroom on where to find great yoga or Pilates
classes, fitness centers, and health and wellness information and events.
Solicited a select number of local yoga studios, health clubs, and fitness centers
to stock and retail a small assortment of lululemon’s products.
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attendees before and after class, promoting attendance at local fitness and wellness
events, and stimulating interest in the soon-to-open retail store. lululemon used
showrooms as a means of “pre-seeding” the opening of a lululemon retail store
primarily in those locations where no other lululemon retail stores were nearby.
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Wholesale Sales Strategy
lululemon also marketed its products to select premium yoga studios, health clubs,
and fitness centers as a way to gain the implicit endorsement of local fitness
personnel for lululemon branded apparel, familiarize their customers with the
lululemon brand, and give them an opportunity to conveniently purchase
lululemon apparel.
lululemon management did not want to grow wholesale sales to these types of
establishments into a significant revenue contributor. Rather, the strategic objective
of selling lululemon apparel to yoga studios, health clubs, and fitness centers was to
build brand awareness, especially in new geographic markets both in North
America and other international locations where the company intended to open
new stores. Wholesale sales to outlet stores were made only to dispose of excess
inventories and thereby avoid in-store markdowns on slow-selling items.
lululemon had entered into license and supply arrangements with partners in the
Middle East and Mexico to operate lululemon athletica branded retail locations in
the United Arab Emirates, Kuwait, Qatar, Oman, Bahrain and Mexico. lululemon
retained the rights to sell lululemon products through their e-commerce websites in
these countries. Under the arrangement, lululemon supplied their partners with
lululemon products, training, and other support. As of February 2020, there were
four licensed retail locations in Mexico, three in the United Arab Emirates, and
one in Qatar, none of which were included in the company-operated store numbers
in Exhibit 1.
The company’s wholesale sales to all these channels accounted for $340 million in
sales, or 8.6 percent of total net revenues in fiscal 2019, versus 9.2 percent of total
net revenues for the company in fiscal 2018.
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Direct-to-Consumer Sales Strategy
In 2009, lululemon launched its e-commerce website, www.lululemon.com, to enable
customers to make online purchases, supplement its already-functioning phone
sales activities, and greatly extend the company’s geographic market reach.
Management saw online sales as having three strategic benefits: (1) providing
added convenience for core customers, (2) securing sales in geographic markets
where there were no lululemon stores, and (3) helping build brand awareness,
especially in new markets, including those outside of North America. As of May
2020, the company website reached 6 continents and 84 separate countries in
North America, South America, Africa, Asia, Europe, and the Middle East.
lululemon provided free standard shipping (2–6 business day delivery) on all
lululemon to customers in North America; a flat $30 shipping fee (5–10 business
day delivery) was charged to buyers located in international destinations.
The merchandise selection that lululemon offered to online buyers differed
somewhat from what was available in the company’s retail stores. A number of the
items available in stores were not sold online; a few online selections were not
available in the stores. Styles and colors available for sale online were updated
weekly. On occasion, the company marked down the prices of some styles and
colors sold online to help clear out the inventories of items soon to be out-of-
season and make way for newly-arriving merchandise—online customers could view
the discounted merchandise by clicking on a “we made too much” link.
In addition to making purchases, website visitors could browse information about
what yoga was, what the various types of yoga were, and their benefits; learn about
fabrics and technologies used in lululemon’s products; read recent posts on
lululemon’s yoga blog; and stay abreast of lululemon activities in their
communities. The company planned to continue to develop and enhance its e-
commerce websites in ways that would provide a distinctive online shopping
experience and strengthen its brand reputation.
http://www.lululemon.com/
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Direct-to-consumer sales at the company’s websites had become an increasingly
important part of the company’s business, with e-commerce sales climbing from
$106.3 million in fiscal 2011 (10.6 percent of total net revenues) to $1.14 billion in
fiscal 2019 (28.6 percent of total revenues)—equal to a compound annual growth
rate of 34.5 percent. In April 2020, when the majority of lululemon’s retail stores
in North America and elsewhere were closed due to COVID-19, e-commerce
became a vital link between the company and the consumer. Exhibit 4 shows
the growth in quarterly e-commerce sales for fiscal years 2018 and 2019 and the
first quarter of 2020.
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EXHIBIT 4 lululemon’s Quarterly E-commerce Sales, Q1 2018 through Q1
2020
Online Sales Quarter 1 Quarter 2 Quarter 3 Quarter 4
2018 $157.8 million $167.4 million $189.4 million $344.2 million
2019 209.8 million 217.6 million 246.7 million 463.7 million
2020 352.0 million
Source: Quarterly Financial Results, posted in the Investor Relations section at www.lululemon.com.
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Product Design and Development Strategy
lululemon’s product design efforts were led by a team of designers based in
Vancouver, British Columbia partnering with various international designers. The
design team included athletes and users of the company’s products who embraced
lululemon’s design philosophy and dedication to premium quality. Design team
members regularly visited retail stores in a proactive effort to solicit feedback on
existing products from store customers and fitness ambassadors and to gather their
ideas for product improvements and new products. In addition, the design team
used various market intelligence sources to identify and track market trends. On
occasion, the team hosted meetings in several geographic markets to discuss the
company’s products with local athletes, trainers, yogis, and members of the fitness
industry. The design team incorporated all of this input to make fabric selections,
develop new products, and make adjustments in the fit, style, and function of
existing products.
The design team worked closely with its apparel manufacturers to
incorporate innovative fabrics that gave lululemon garments such characteristics as
stretch ability, moisture-wicking capability, color fastness, feel-good comfort, and
durability. Fabric quality was evaluated via actual wear tests and by a leading
testing facility. Before bringing out new products with new fabrics, lululemon used
the services of leading independent inspection, verification, testing, and
certification companies to conduct a battery of tests on fabrics for such
performance characteristics as pilling, shrinkage, abrasion resistance, and
colorfastness. Lastly, lululemon design personnel worked with leading fabric
suppliers to identify opportunities to develop fabrics that lululemon could
trademark and thereby gain added brand recognition and brand differentiation.
Where appropriate, product designs incorporated convenience features, such as
pockets to hold credit cards, keys, digital audio players, and clips for heart rate
monitors and long sleeves that covered the hands for cold-weather exercising.
Product specifications called for the use of advanced sewing techniques, such as
flat seaming, that increased comfort and functionality, reduced chafing and skin
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irritation, and strengthened important seams. All of these design elements and
fabric technologies were factors that management believed enabled lululemon to
price its high-quality technical athletic apparel at prices above those of traditional
athletic apparel.
Typically, it took 8 to 10 months for lululemon products to move from the design
stage to availability in its retail stores; however, the company had the capability to
bring select new products to market in as little as two months. Management
believed its lead times were shorter than those of most apparel brands due to the
company’s streamlined design and development process, the real-time input
received from customers and ambassadors at its store locations, and the short
times it took to receive and approve samples from manufacturing suppliers. Short
lead times facilitated quick responses to emerging trends or shifting market
conditions.
lululemon management believed that its design process enhanced the company’s
capabilities to develop top quality products and was a competitive strength.
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Sourcing and Manufacturing
Production was the only value chain activity that lululemon did not perform
internally. Lululemon did not own or operate any manufacturing facilities to
produce fabrics or make garments. In 2019, fabrics were sourced from a group of
approximately 76 fabric manufacturers, with five fabric manufacturers supplying 59
percent of the total and the largest single fabric manufacturer supplying 32 percent
of the fabric used. During fiscal year 2019, approximately 46 percent of the
required fabrics were sourced from suppliers in Taiwan, 14 percent from suppliers
in mainland China, 19 percent from manufacturers in Sri Lanka, and the
remainder from other regions. Other raw materials used in lululemon products,
such as content labels, elastics, buttons, clasps, and drawcords, were obtained from
suppliers located predominantly in the Asia Pacific region.
Garments were sourced from approximately 39 contract manufacturers,
five of which produced approximately 56 percent of the company’s products in
fiscal 2019, with the largest of these producing about 17 percent of the total.
During fiscal 2019, approximately 33 percent of the company’s products were
produced in Vietnam, 16 percent in Cambodia, 15 percent in Sri Lanka, 11 percent
in China (including two percent in Taiwan), and the remainder in other countries.
The company deliberately refrained from entering into long-term contracts with
any of its fabric suppliers or manufacturing sources, preferring instead to transact
business on an order-by-order basis and rely on the close working relationships it
had developed with its various suppliers over the years. lululemon maintained
production relationships with several manufacturers in North America that
provided the company with the capability to speed select products to market and
respond quickly to changing trends and unexpectedly high buyer demand for
certain products.
lululemon took great care to ensure that its manufacturing suppliers shared
lululemon’s commitment to quality and ethical business conduct. All
manufacturers were required to adhere to a vendor code of ethics regarding quality
of manufacturing, working conditions, environmental responsibility, fair wage
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practices, and compliance with child labor laws, among others. lululemon utilized
the services of a leading inspection and verification firm to closely monitor each
supplier’s compliance with applicable law, lululemon’s vendor code of ethics, and
other business practices that could reflect badly on lululemon’s choice of suppliers.
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Distribution Facilities
lululemon shipped products to its stores from owned or leased distribution facilities
in the United States, Canada, and Australia. The company owned a 310,000 square-
foot distribution center in Columbus, Ohio and operated a leased 156,000 square-
foot distribution center in Vancouver, British Columbia, a leased 250,000 square-
foot distribution facility in Toronto, Ontario, and a leased 150,000 square-foot
facility in Sumner, Washington. All four were modern and cost-efficient. In 2011,
the company began operations at a leased 54,000 square-foot distribution center in
Melbourne, Australia, to supply its stores in Australia and New Zealand. Third-
party logistics providers in China and the Netherlands were used to warehouse and
distribute finished products from their warehouse locations to supply the
company’s retail stores in China and Europe. Merchandise was typically shipped to
retail stores through third-party delivery services multiple times per week, thus
providing stores with a steady flow of new inventory.
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lululemon’s Community-Based Marketing Approach and Brand-Building
Strategy
One of lululemon’s differentiating characteristics was its community-based
approach to building brand awareness and customer loyalty. Local fitness
practitioners chosen to be ambassadors introduced their fitness class attendees to
the lululemon brand, thereby leading to interest in the brand, store visits, and word-
of-mouth marketing. Each yoga-instructor ambassador was also called upon to
conduct a complimentary yoga class every four to six weeks at the local lululemon
store they were affiliated with. In return for helping drive business to lululemon
stores and conducting classes, ambassadors were periodically given bags of free
products, and large portraits of each ambassador wearing lululemon products and
engaging in physical activity at a local landmark were prominently displayed on the
walls their local lululemon store as a means of helping ambassadors expand their
clientele.
Every lululemon store had a dedicated community coordinator who developed a
customized plan for organizing, sponsoring, and participating in local athletic,
fitness, and philanthropic events. In addition, each store had a community events
bulletin board for posting announcements of upcoming activities, providing fitness
education information and brochures, and promoting the local yoga studios and
fitness centers of ambassadors. There was also a chalkboard in each store’s fitting
room area where customers could scribble comments about lululemon products or
their yoga class experiences or their appreciation of the assistance/service provided
by certain store personnel; these comments were relayed to lululemon headquarters
every two weeks. Customers could use a lululemon micro website to track their
progress regarding fitness or progress toward life goals.
lululemon made little use of traditional advertising print or television
advertisements, preferring instead to rely on its various grassroots, community-
based marketing efforts and the use of social media (like Facebook and Twitter) to
increase brand awareness, reinforce its premium brand image, and broaden the
appeal of its products.
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Store Personnel
As part of the company’s commitment to providing customers with an inviting and
educational store environment, lululemon’s store sales associates, who the
company referred to as “educators,” were coached to personally engage and
connect with each guest who entered the store. Educators, many of whom had
prior experience as a fitness practitioner or were avid runners or yoga enthusiasts,
received approximately 30 hours of in-house training within the first three months
of their employment. Training was focused on (1) teaching educators about leading
a healthy and balanced life, exercising self-responsibility, and setting lifestyle goals,
(2) preparing them to explain the technical and innovative design aspects of all
lululemon products, and (3) providing the information needed for educators to
serve as knowledgeable references for customers seeking information on fitness
classes, instructors, and events in the community. New hires that lacked knowledge
about the intricacies of yoga were given subsidies to attend yoga classes so they
could understand the activity and better explain the benefits of lululemon’s yoga
apparel.
People who shopped at lululemon stores were called “guests,” and store personnel
were expected to “educate” guests about lululemon apparel, not sell to them. To
provide a personalized, welcoming, and relaxed experience, store educators
referred to their guests on a first name basis in the fitting and changing area,
allowed them to use store restrooms, and offered them complimentary fresh-filtered
water. Management believed that such a soft-sell, customer-centric environment
encouraged product trial, purchases, and repeat visits.
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Core Values and Culture
Consistent with the company’s mission of “providing people with the components
to live a longer, healthier and more fun life,” lululemon executives sought to
promote and ingrain a set of core values centered on developing the highest-quality
products, operating with integrity, leading a healthy balanced life, and instilling in
its employees a sense of self responsibility and the value of goal setting. The
company sought to provide employees with a supportive and goal-oriented work
environment; all employees were encouraged to set goals aimed at reaching their
full professional, health, and personal potential. The company offered personal
development workshops and goal-coaching to assist employees in achieving their
goals. Many lululemon employees had a written set of professional, health, and
personal goals. All employees had access to a “learning library” of personal
development books that included Steven Covey’s The Seven Habits of Highly
Effective People, Rhonda Byrne’s The Secret, and Brian Tracy’s The Psychology of
Achievement.
Chip Wilson had been the principal architect of the company’s culture and core
values, and the company’s work climate through 2013 reflected his business and
lifestyle philosophy. Wilson had digested much of his philosophy about life in
general and personal development into a set of statements and prescriptions that
he called “the lululemon manifesto.” The manifesto was considered to be a core
element of lululemon’s culture. Senior executives believed the company’s work
climate and core values helped it attract passionate and motivated employees who
were driven to succeed and who would support the company’s vision of “elevating
the world from mediocrity to greatness”—a phrase coined by Chip Wilson in the
company’s early years. For a number of years, the company’s shopping bags were
emblazoned with a full print of the manifesto, as a means of sharing its culture and
beliefs about life in general with customers, the local community, and the public at
large.
In 2018, to celebrate the company’s 20th year in business, lululemon’s Brand
Creative Director Rémi Paringaux headed an effort to create a freshly designed
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manifesto showcasing lululemon’s long-standing brand values across nine themes:
Integrity, Personal Responsibility, Social Impact, Honesty/Authenticity,
Overcoming Fear, Greatness, Purpose, Elevating the World (even on hard days),
and Fun + Laughter, Sweat + The Practice of Yoga. Each phrase included in the
Manifesto, both the original devised by Chip Wilson and the revised version, was
intentionally designed to inspire, provoke thought, and spark conversation.
Excerpts from the Manifesto are shown in Exhibit 5.
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EXHIBIT 5 Excepts from The lululemon Manifesto, as Revised in 2018
Source: The lululemon expert, “The lululemon Manifesto: The Controversies (!) and also my favorite Manifesto-
printed items,” www.lululemonexpert.com, September 6, 2019, accessed May 26, 2020.
Breathe deeply
Hope is not a strategy
Put away your phone. The real world is not on hold.
Creativity is maximized when you are living in the moment
Your biggest opportunity for growth is when it all hits the fan
Gratitude is contagious
That which matters most should never give way to that which matters least
Reconnect with nature. The better you know it the less you take it for granted
The most important answers will never be found in a search bar
Open your ears, eyes and heart &Open your mind
Jealousy works the opposite way you want it to
Replace the word Try with Will and watch the magic happen
The pursuit of happiness is the source of unhappiness
Before speaking, ask yourself: Is it kind? Is it necessary? Is it true?
You attract love when you love yourself
Treat goals like coconuts. Hit them hard, crack them open, celebrate
Do one thing a day that scares you
Life is full of setbacks; success is determined by how you handle setbacks
This is not your practice life. This is all there is
Stress is related to 99% of all illness
Friends are more important than money
Vulnerability makes a good leader great
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COMPETITION IN ATHLETIC APPAREL
Competition in the market for athletic and fitness apparel was fierce.
Companies competed principally on product quality, performance
features, innovation, fit and style, distribution capabilities, brand image and
recognition, and price. Rivalry among competing brands was global, vigorous, and
involved both established companies who were expanding their production and
marketing of performance products and recent entrants attracted by the growth
opportunities.
lululemon competed with wholesalers and direct sellers of premium performance
athletic apparel made of high-tech fabrics, most especially Nike, The adidas Group
AG (which marketed athletic and sports apparel under its adidas and Reebok
brands), and Under Armour. Nike had a powerful and well-known global brand
name, an extensive and diverse line of athletic and sports apparel, and 2019 global
sales of $39.1 billion ($15.9 billion in North America). Nike’s sales outside of
North America accounted for just over 57 percent of its worldwide revenues in
fiscal 2019. Not only was Nike the world’s largest seller of athletic footwear (its
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footwear sales exceeded $26 billion in fiscal 2019), but it was also the world’s
largest sports apparel brand, with 2019 sales of $11.6 billion. Sales of Nike
products to women totaled $7.4 billion in 2019. The company had selling
arrangements with independent distributors and licensees in over 190 countries; its
retail account base for sports apparel in the United States included a mix of
sporting goods stores, athletic specialty stores, department stores, and tennis and
golf shops, plus it had a network of factory outlet stores (217 in the United States
and 648 across the rest of the world) and Nike and NIKETOWN retail stores (29
in the United States and 57 in the rest of the world). Nike also had a strong online
sales presence with websites in 46 countries; in fiscal year 2019, its Nike Direct
revenues were $5.0 billion in North America and $7.1 billion worldwide.
The adidas Group, with its adidas and Reebok brands, was a global company
headquartered in Germany that had worldwide sales of €23.6 billion ($26.0
billion) in 2019. Worldwide sports apparel revenues for the company were €9.0
billion ($9.9 billion) in 2019; its product lines consisted of high-tech performance
garments for a wide variety of sports and fitness activities, as well as recreational
sportswear. The adidas Group sold products in virtually every country of the world.
In 2019, its extensive product offerings were marketed through third-party retailers
(sporting goods chains, department stores, independent sporting goods retailer
buying groups, lifestyle retailing chains, and Internet retailers), 2,500 company-
owned adidas and Reebok retail stores, 15,000 franchised stores, and through the
company’s e-commerce websites at www.adidas.com and www.reebok.com.
Under Armour, an up-and-coming designer and marketer of performance sports
apparel, had total sales of $5.3 billion in 2019, of which $3.58 billion was in
apparel. Like lululemon, Under Armour’s apparel products were made entirely of
technically-advanced, high performance fabrics and were designed to be
aesthetically appealing, as well as highly functional and comfortable. Under
Armour regularly upgraded its products as next-generation fabrics with better
performance characteristics became available. Under Armour’s product line
included apparel for men, women, and children. Under Armour’s sales in North
http://www.adidas.com/
http://www.reebok.com/
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America unexpectedly plateaued at $4.0 in 2016, then dropped to $3.8 billion in
2017, $3.74 billion in 2018, and $3.66 billion in 2019. The company reported net
losses $48.3 million in 2017 and $46.3 million in 2018. While roughly 70 percent of
Under Armour’s sales revenues in 2019 were in North America, the company’s
revenues were growing in the other regions of the world where its products were
sold, particularly in the EMEA (Europe-Middle East-Africa) region and the Asia-
Pacific region. The majority of Under Armour’s sales were made through wholesale
channels, including sporting goods stores, independent and specialty retailers,
department stores, institutional athletic departments, and sports leagues and
teams. However, the company also operated 169 factory outlet stores and 19 Brand
House stores in North America and 104 factory outlet stores and 96 Brand House
stores in international locations as of January 2020. Under Armour had direct-to-
consumer sales of about $1.8 billion annually at its e-commerce website, www.under
armour.com.
Nike, The adidas Group, and Under Armour all aggressively marketed
and promoted their high-performance apparel products to women and men and
spent heavily to grow consumer awareness of their brands and build brand loyalty.
All three sponsored numerous athletic events, provided uniforms and equipment
with their logos to collegiate and professional sports teams, and paid millions of
dollars annually to numerous high-profile male and female athletes to endorse their
products. Like lululemon, they designed their own products but outsourced the
production of their garments to contract manufacturers.
New Entrants into the Sports and Fitness Apparel Market for Women. Retailers
responded to the growing market for women’s sports and fitness apparel by
introducing brands and product lines to compete in this segment. Entrants into this
segment of the apparel market included The Gap, Nordstrom, and Victoria’s
Secret.
The Gap had total sales of $16.4 billion in 2019 and was the owner/operator of
three well-known retail chains: The Gap, Banana Republic, and Old Navy. Product
offerings at the 1,033 worldwide Gap-branded stores included a GapFit collection
http://www.underarmour.com/
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of fitness and lifestyle products for women. In 2008, The Gap spent $150 million to
acquire Athleta, whose product line consisted of yoga, running, skiing,
snowboarding, and surfing apparel that was sold online and through catalogs, and
proceeded to turn it into a retail chain to compete head-on against lululemon in the
market for comfortable, fashionable, high-performance women’s apparel for
workouts, sports, physically-active recreational activities, and leisure wear. Going
into 2020, Athleta had grown to 190 retail stores in North America Athleta stores
open at least 12 months had sales growth of 16 percent, 9 percent, and 5 percent in
2017, 2018, and 2019, respectively. The Gap planned to continue opening Athleta
stores in 2020 and beyond. In addition to its retail stores, Athleta collected
substantial revenues from sales at its e-commerce website www.athleta.gap.com.
Athleta also had a social media website, www.athleta.net/chi, that connected women
with interests in sports and fitness, nutrition and health, tutorials and training
plans, and travel and adventure.
Athleta’s expanding product line included swimwear, tops, bras, jackets, sweaters,
pants, tights, shorts, tee shirt dresses, performance footwear, sneakers, sandals,
bags, headwear, and gear. Items were colorful, stylish, and functional. As of May
2020, Athleta offered 391 different items under “activity” line of products at its e-
commerce website. Athleta apparel items were typically available in sizes XXS, XS,
S, M, L, XL, and plus sizes 1X and 2X. Athleta utilized well-known women athletes
and local fitness instructors to serve as brand ambassadors by posting blogs on
Athleta’s website, teaching classes at local stores, and testing Athleta garments. In
2016, Athleta introduced Athleta Girl, which introduced fashion and accessories
for younger women. In 2019, Athleta announced a partnership with decorated
track and field athlete Allyson Felix.
A number of other national and regional retailers of women’s apparel, seeking to
capitalize on growing sales of activewear made of high-tech fabrics, were marketing
one or more brands of fitness apparel suitable for yoga, running, gym exercise, and
leisure activities. A few were selling these items under their own labels. For
example, Nordstrom, a nationally-respected department store retailer, was
http://www.athleta.gap.com/
http://www.athleta.net/chi
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merchandising its own Zella line of attire for yoga, cross-training, workouts,
swimming, and “beyond the workout;” many of the initial products in the Zella
collection were designed by a former member of lululemon’s design team. Zella-
branded products were offered in regular sizes (XXS, XS, S, M, L, XL, and XXL)
and plus sizes (1X, 2X, and 3X). Nordstrom was also marketing several other
brands of activewear for women, men, and juniors, including Nike, Under Armour,
Patagonia, Reebok, and Adidas. In 2019, Nordstrom’s activewear offerings could be
purchased at 136 Nordstrom full-line department stores (typically 140,000 to
250,000 square-feet in size) and 242 Nordstrom Rack stores (typically 30,000 to
50,000 square-feet in size) in 36 states, at Nordstrom’s website
(www.nordstrom.com), and at the Nordstrom Rack website, www.nordstromrack.com.
Victoria’s Secret also marketed its own line of women’s fitness apparel
under the Sport label. As of May 2020, Victoria’s Secret offered 118 separate Sport
brand items on the company’s e-commerce website, www.victoriassecret.com.
Offerings included sports bras, bottoms, yoga pants, sweatshirts, and hoodies.
Typically, the items in the Athleta, GapFit, Zella, and Sport collections were priced
10 percent to 25 percent below similar kinds of lululemon products. Likewise,
Nike, Under Armour, adidas, and Reebok apparel items were usually less expensive
than comparable lululemon-branded items.
http://www.nordstrom.com/
http://www.nordstromrack.com/
http://www.victoriassecret.com/
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GLOBAL PANDEMIC FORCES TEMPORARY
CLOSURE OF MANY RETAIL STORES ACROSS THE
WORLD
An outbreak of the COVID-19 disease, also known as the coronavirus, began in
China in December 2019, spread to other countries in the first several months of
2020, and was declared a global pandemic by the World Health Organization in
March 2020. Mounting concerns about the potential for the coronavirus to infect a
large percentage of the population and overwhelm local hospitals and health
professionals, prompted government officials in many countries during February-
April 2020 to issue “stay-at-home” orders to the general public, urge companies to
allow employees to work from home where feasible, and mandate the closure of
retail stores and all “non-essential” local businesses until the daily/weekly number
of people in their locales being newly diagnosed with COVID-19 began to flatten
out or subside. People were urged to practice “social distancing” and wear face
masks when grocery-shopping, picking up to “to-go orders” from local food
establishments, or otherwise venturing out beyond the confines of their homes to
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run errands. However, by the end of May 2020, widespread concerns about the
long-term economic damage the business shutdowns were causing and signs that
the spread of the virus was being contained in a growing number of locations
prompted government officials to begin reopening their local economies. A growing
percentage of retail stores had re-opened or partially re-opened in much of Asia,
and limited re-openings were occurring in Europe and North America.
The global pandemic had a devastating impact on most apparel retailers. In North
America, luxury retailer Neiman Marcus, apparel retailer J Crew, and department
store retailer J.C. Penney filed for bankruptcy in May 2020. Nordstrom announced
on May 5, 2020, that it would soon permanently close 16 department store
locations. The Gap, Inc. was also struggling in the new environment; the price of
the company’s stock had plummeted since January 2020, and most of its stores in
the United States remained closed as of late May 2020. Back in February 2019,
The Gap announced it would close some 230 of its stores over the next two years.
L Brands announced it would not be making rent payments while its Victoria’s
Secret and Bath and Body Works stores were closed. Many other retail and
restaurant chains, also running short on cash, told landlords that they would be
unable to make their rent payments until their stores and their cash flows improved.
Headed into June 2020, most all chain retailers and millions of local businesses in
North America, Europe, and elsewhere were wrestling with the uncertainty created
by the global pandemic, store closures, how long it would take for customer traffic
to return to former levels, and the extent to which consumer buying and shopping
patterns would be affected both in the short term and the long term.
Retailers with robust e-commerce sales were better able to weather the global
pandemic crisis. Nike, the global sports apparel leader, had a strong digital
presence and was expected to experience only a modest and fairly short-lived
downturn in apparel revenues. forecast to weather the storm. Further, with the re-
opening of the company’s Nike stores in China in May 2020, the company saw
signs of sales improvement in Asia, pointing the way to a possible strong recovery
in Europe and North America. The adidas Group, number two globally and15
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financially strong, was also expected to come through the pandemic in a
competitively strong position. Under Armour’s situation, already weakened by sales
troubles in North America, was made worse by the pandemic. Many investors and
industry analysts believed the near-term hit to the company’s sales could be as
much as 30 percent in 2020. As of May 2020, the company had announced layoffs,
pay cuts for remaining employees, and the postponement of plans for an Under
Armour flagship store in New York City.16
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LOOKING AHEAD AT LULULEMON
In a March 26, 2020, conference call to discuss the company’s Q4 and
full-year 2019 performance with Wall Street analysts, lululemon CEO
Craig McDonald commented on the impacts of the coronavirus pandemic:17
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… .we are seeing virus-related impact on performance across our markets. In
North America and Europe, our stores have been closed since March 16. Stores
in New Zealand are closed at this time, while Australia is operating on reduced
hours. In China, all of our stores except our location in Wuhan are open with
most operating on regular schedules. Our stores also remained open in other
Asian markets, except for Malaysia, where our two locations are currently closed.
In addition, we are closely monitoring our supply chain and staying in constant
contact with our vendors as they too navigate this situation.
… .the underlying health of our business is strong… . we are confident in our
abilities to navigate the near-term while working to realize the opportunities over
the longer term… we have early learnings from China which show us that our
business will bounce back. We are not yet back to pre-closing volumes, but the
business is getting stronger week by week.
Although we do not know exactly when the current situation will pass, what we
do know is that our stores will reopen. We know that initially the business will be
lower than it was pre-COVID-19, but we believe that each day and each week, it
will keep building. We are planning for multiple scenarios, but in any one of
these we know that our brand is strong and has unique pillars of strength that
will keep driving our momentum forward.
As of May 21, 2020, lululemon had reopened more than 150 stores across five
continents. Plans called for reopening another 200 stores over the following two
weeks. Modified store hours, store employee face coverings, physical distancing,
enhanced store cleaning and sanitization, and a more relaxed return policy were
being instituted at all reopened stores.
