MCMASTER INVESTMENT COUNCIL - LULULEMON (NASDAQ: LULU)
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Lululemon (NASDAQ: LULU) McMaster Investment Council Consumer Goods Team
Consumer Goods Team
Portfolio Manager Analyst Analyst Analyst
Graham Hodder Doris Feng Ryan Whitcher Marc Ferrari
Program: Honours Commerce Program: Honours Commerce Program: Honours Commerce Program: Honours Commerce
Year: 4th Year: 3rd Year:3rd Year: 2nd
Prior Experience: Wells Fargo, TD Asset Prior Experience: Sunlife Strategy Prior Experience: TD Wealth, Market Prior Experience: Real Estate
Management Research Intern Investor, Beacon Hall Golf Club
11/18/2019 McMaster Investment Council 2I Industry Overview
Industry Overview
Industry Revenue Market Breakdown
North America Specialty Apparel Revenue Market Share Athleisure Sector
Key Highlights Key Highlights
70,000
NIKE
60,000 Average 10% YOY revenue 4% LULU’s contribution to
growth in the NA athletic 6% industry growth continues to
ADIDAS
50,000 wear segment since 2014 6% increase
40,000 VF CORP
10% 42%
LULU has driven 25% of NA
30,000 Active/athletic revenue UNDER industry growth since 2015,
20,000 has grown +$1.6B over the ARMOUR only trailing Nike but crucially
past five years PUMA SE ahead of Adidas
10,000
0 Athletic brands should be 30% LULULEMON Nike and Adidas expected
2014 2015 2016 2017 2018 2019 2020E +$21B larger in FY19 than ATHLETICA to increase their market
in FY13 compared to share by 3% by 2021
traditional brands
Key Trends Macro outlook
Rise of E-Commerce Increase in Yoga and Athleisure demand Disposable Income per Capita Garment Spending
55000 340
Digital and e-commerce has been a Total yoga bottom wear market expected
powerful driver of EBIT margin to reach $1.721 billion by 2021 50000 320
improvement.
45000 300
Industry estimates ecommerce sales Athletic wear is no longer limited to the
to double by 2023 gym and created a new category of 40000 280
“athleisure” 2016 2017 2018 2019 2016 2017 2018 2019
Disposable income per capita increasing Personal spending increased by 3.9% in
Increase interest in men's athletic wear has at average of 5% since 2016 2019
further boosted market segment
Increase in income and personal
US median income increased to $63,179 spending has driven spending in
in 2019 consumer discretionary and athleisure
0% 20% 40% 60% revenues upward
% increase in ecommerce sales (2019)
The athletic apparel industry looks to continue growth at a faster rate than it has in the past
11/18/2019 McMaster Investment Council 4ETF Comparison
Nov - 14 Nov - 15 Nov - 16 Nov - 17 Nov - 18 Nov - 19
Index/Security Ticker
S&P/TSX SPY
S&P Retail ETF XRT
iShares Global Consumer Discretionary ETF RXI
Lululemon Athletica LULU
LULU is significantly outperforming the broad retail market as a whole
11/18/2019 McMaster Investment Council 5Company Overview II
Company Overview
Company Snapshot Financial Snapshot
Lululemon Athletica Inc is a designer, distributor and retailer of athletic
apparel. (LULU: $27.15B
Ticker Enterprise Value
• Operate through two primary segments: Direct-to-Consumer and retail NASDAQ)
stores
Regulations in Ontario
• LULU #1 fashion trend amongst females and #7 overall preferred female
Share Price $205.91 P/E 51.4x
apparel brand
• Founded in 1998 in Vancouver, IPO issued in 2007 at $14
• 440 company-operated locations worldwide across 14 countries, 80% of Market Cap $26.99B EV/EBITDA 30.8x
stores in North America
• Large focus on fostering a community that reflects a healthy lifestyle
52 Week Low- $110.71 -
• Known for unparalleled brand quality and comfortability across all product EBITDA Margin 25.2%
High $205.91
lines
Revenue Breakdown Retail Store Locations
Revenue by Geography Revenue by Segment
Other
Other 11% 9%
Canada 17%
DTC
26%
Stores
65%
USA 72% US Canada Australia + NZ China Region Europe
LULU’s has grown into an international athletic apparel powerhouse with a strong fundamentals
11/18/2019 McMaster Investment Council 7Management Overview
Chief Executive Officer COO & EVP, International Chief Product Officer Chief Financial Officer
Calvin McDonald Stuart Haselden Sun Choe Patrick Guido
Background: Background: Background: Background:
• CEO of Sephora’s America • CFO of Lulu for 5 years • SVP Merchandising at Lulu • 7 Years at VF Corp. as VP of
for 5 Years (LVMH Owned) • CFO of J.Crew for 3 years • Various Management roles Corporate Development &
• EVP of Loblaws for 17 Years • 20+ years in strategy & in retail including, Guess, Treasury
operations roles at F500 Levis & CPO at Marc • 15+ years in finance roles at
retail companies Jacobs F500 retail companies
Education: Education: Education: Education:
• Rotman MBA – University • MBA from A.B Freeman • Bachelor of Arts University • MBA – Vanderbilt University
of Toronto School of Business of Maryland • CFA Charterholder
• Bachelor of Science from • Bachelor of Arts degree • B.Sc from Georgetown
Western University from Auburn University University
LULU’s management team is focused on driving growth strategies while sustaining strong brand loyalty
11/18/2019 McMaster Investment Council 8Stock Performance
2 Year Stock Chart
$250
$200 6
5
4
$150
$100 3
2
1
$50
$0
06-Jan-2017 06-Jan-2018 06-Jan-2019
Company History Largest Institutional Money Manager Ownership Stakes
Date Headline
14.93%
1 Aug 2017 Restructuring of Ivivva brand, closed 47 out of 55 stores
Conclusion of a rapid retail expansion that saw over 40 retail locations 8.49%
2 Dec 2017
added in F17
3 Jul 2018
Loyalty program rollout in North America and New CEO Calvin
7.50%
McDonald
4 Mar 2019 $163M share buyback. Repurchased 1M shares
4.29% 9
5 Apr 2019 Implemented “Power of Three” strategic plan
2.39%
6 Sept 2019 2020 Q2 Earnings release
1
Stock price has continued on an upward trajectory and isn’t done growing
11/18/2019 McMaster Investment Council 9Supply Chain Analysis
Supply Chain Overview and Process
Raw Materials & Suppliers Primary Supplier Overview
• Lululemon does not own or produce and of its fabrics directly
Eclat textile
• Its trademarked “Luon” fabric is its largest fabric requirement, 36.5% of COGS
making up about 30% of the company’s total fabric use. The fabric is
sourced from a single supplier Delta GalilCompany Overview: Strong Fundamentals
Historical EBITDA Picture Free Cashflow Growing
$900 $826.84
$600
%
$800 CAGR of 17 $517.00
$700 $500
$595.21
$600 $508.58 $400
$500 $434.40 $442.46 $331.50
$400 $300 $236.90
$197.40
$300 $200 $154.10
$200
$100 $100
$- $-
2015 2016 2017 2018 2019 2015 2016 2017 2018 2019
Gross Margin & EBITDA Margin Comparable Store Sales
20%
27% 55% 56% 18%
18%
25% 54% 16%
53%
14%
23% 51% 52%
12%
21% 50% 10%
48% 8% 7% 7%
19% 48% 6%
6% 5%
17% 46% 4%
2% 1%
15% 44%
0%
2016 2017 2018 2019
2013 2014 2015 2016 2017 2018
Gross margin EBITDA Margin
Lulu has demonstrated resiliency and a strong ability to grow financial and operational metrics
11/18/2019 McMaster Investment Council 11Investment Theses III
Investment Thesis I – Strong Internal Capabilities Driving Growth
Sustainable Competitive Edges Strong Financial Metrics
5-Year Revenue CAGR 5-Year EPS CAGR
Innovative, High Quality Products
Lulu constantly improves product quality
through inventions such as new fabrics
30.6%
26.9%
Customer-centric Approach 22%
21.0%
Lulu has placed customers at the heart of the 18.0%
15.5%
13.2%
corporation by iterating products based on 10% 9% 10.2%
8% 8%
consumer feedback 4%
6%
Customer Loyalty
Their products have garnered a “Community-
environment” as Lulu has translated co- 1. Highest revenue growth within the industry
created experiences into an effective
customer acquisition and retention strategy 2. High sale/low awareness ratio points to exceptionally loyal customer base
3. Second largest driver of North American Category Growth
4. Highest sales per square feet of any U.S. apparel retailer
Low Sales-to-Awareness
27%
70%
92%
25%
Lulu’s sustainable competitive edges and strong performance have resulted in industry leading growth rates and margins
11/18/2019 McMaster Investment Council 13Investment Thesis II – Market Penetration Strategies
Continue to Grow Men’s Market
Current State Opportunity Future State
Only 21% of business is
currently coming from men 35% Men’s athleisure 1 Double revenue in the next 5
Growth in Q2 ’19 years
segment projected
21%
33% to grow at a CAGR 2 Double breadth and segment
Growth in Q1 ’19
20% CAGR offerings
Opportunity in of 20% over the
the next 5 years
$1B
Ahead of Schedule in reaching next five years 3 Increase the amount of
79% Sales Target targeted campaigns
Introduction of the Loyalty Program Expand Omnichannel Offerings
Personal development curriculum LULU has been able to balance in store with online sales as store traffic has risen the past quarters as
Lululemon well – this is a balancing act which many competitors have accomplished
Practice Monthly classes hosted in local studios by LULU ambassadors
Offering Highlights
Member only development programs and events
Mobile point of sale
$148 annual fee Innovated ‘buy online,
Exclusive membership products Online only size and color capabilities to complete
pick up in store
offerings purchase anywhere in
capabilities’
store
Piper Jaffray’s Spring 2019 Teen Survey has been a leading indicator for brand
momentum
• LULU is the #7 preferred female apparel brand
• Saw 4x share gains as a male athletic brand vs. 1.5 years ago In recent years it carries > 40% to contribution margin and has increased from
1 11% of revenue in FY12 (~$100M) to 26% in FY19 (>$850M)
Lululemon already enjoys their status as the ‘Starbucks’ of athleisure
Omnichannel offerings already lead to meaningfully results in KPIs: their Q4
2 results from 2018 showed that guest acquisition +30% and email file +70%
The loyalty program could add over $700M in incremental sales
Expanding in the men’s, loyalty program, and digital segment will continue to penetrate markets currently served
11/18/2019 McMaster Investment Council 14Investment Thesis III – International Growth Strategy in Asia
Current Lulu International Exposure Per Capita Spending Could Double in China in 10 Years
Lulu has 460 stores in total at the end of Q2 2019 Sporting Goods Market Size 2015 2016 2017 2018
Global (PFC Estimates -Billions) $ 265 $ 282 $ 298 $ 315
North America $ 97 $ 102 $ 106 $ 110
Canada Europe Western Europe $ 38 $ 41 $ 43 $ 44
Greater China $ 28 $ 31 $ 35 $ 39
Other $ 102 $ 108 $ 115 $ 121
Estimated Growth Rates (PJC)
64 Global (PFC Estimates) 6.20% 6.50% 5.80% 5.40%
23 North America 5.00% 5.00% 4.00% 4.00%
Western Europe 5.00% 6.00% 5.00% 3.00%
292
43 Asia Greater China 12.00% 12.00% 12.00% 12.00%
Other 6.30% 6.60% 5.90% 5.60%
U.S. 28 are located Population (Billions)
in China Global 7.383 7.467 7.550 7.643
North America 0.356 0.356 0.361 0.364
Western Europe 0.448 0.449 0.450 0.451
Greater China 1.397 1.404 1.410 1.415
Other 5.182 5.256 5.330 5.413
Retail $ Per Capita
38 Global $ 36 $ 38 $ 40 $ 41
North America $ 272 $ 284 $ 293 $ 303
Australia Western Europe $ 86 $ 91 $ 95 $ 98
& New Zealand Greater China $ 20 $ 22 $ 25 $ 28
Other $ 20 $ 21 $ 22 $ 22
Expansion Plans have Garnered Wins Already Future Expansion Strategies
added >505 in combined comps Current State Future State
china e-commerce comp over 200% 34% Revenue Growth in
Opened first store in Stockholm, Sweden
Internationally A favorable channel mix, logistical
>70% Growth in Asia
savings (closer to sourcing base), China is expected to be bigger than the
+ 10% store comp 68% market share growth in
China
stronger store traffic/productivity, and rest of Lulu’s international business by
greater full-price selling creates an ideal FY24
investment landscape
Q2 ‘18 Q3 ‘18 Q4 ‘18 Q1 ‘19 Q2 ‘19
Key driver behind 33% increase in
Operate 150 stores by FY24
revenue in the Asia-Pacific region
+61% Asia Market growth 39% Revenue Growth in There is currently >40% annual square
Internationally Management is focused on international
+50% EMEA Market Growth footage growth and bigger in $ than
sales reaching 25%
Europe
Opened first store in Osaka Japan
Hosted first Sweatlife in Berlin
Large and successful partnership with T-
Launch their own e-commerce site
mall
International growth, mainly fueled by China has opened up additional markets for expansion opportunities
11/18/2019 McMaster Investment Council 15IV Valuation
Company Comparable Analysis
Public Comparable Analysis
EV / EBITDA P/E
Company Name Market Cap Enterprise Value 5-Yr Rev CAGR EBITDA Margin Gross Margin Current FY1 Current FY1
*All figures are in USD as of valuation date
Higher End Clothing Retailer/ Athleisure
Under Armour Inc $7,545 $8,876 10% 7% 45% 19.9x 18.1x 53.1x 38.6x
Nike Inc $140,198 $138,809 8% 14% 45% 24.6x 22.4x 33.5x 29.2x
Adidas AG $60,232 $59,233 9% 13% 52% 15.1x 14.2x 30.5x 24.6x
VF Corp $34,773 $35,109 8% 17% 51% 17.1x 17.3x 25.6x 23.6x
Aritzia Inc $1,595 $1,356 4% 16% 55% 13.4x 10.3x 26.3x 19.0x
Canada Goose Holdings Inc $4,142 $4,772 6% 28% 62% 27.2x 20.0x 42.0x 24.0x
Mean $41,414 $41,359 8% 16% 52% 19.6x 17.1x 35.2x 39.9x
Median $21,159 $21,992 8% 15% 52% 18.5x 17.7x 32.0x 24.3x
Everyday Apparel Brands
American Eagle $2,798 $2,480 4% 12% 54% 8.4x 8.4x 17.2x 14.8x
Gap $6,666 $6,444 1% 12% 38% 4.3x 4.3x 7.0x 10.2x
Levis $6,746 $6,845 3% 12% 37% 4.6x 4.6x 10.9x 10.3x
Mean $5,403 $5,256 3% 12% 43% 5.8x 5.8x 11.7x 11.8x
Median $6,666 $6,444 3% 12% 38% 4.6x 4.6x 10.9x 10.3x
Lululemon Athletica Inc $24,879 $26,593 22% 25% 55% 25.9x 25.4x 49.7x 39.9x
Commentary
• Primary comp group focused on high end clothing brands that reflect a similar business model and target consumer vs. traditional apparel comparables
• Secondary comp group offers similar product offering, but are targeted towards a broader audience
• Lulu has sustained strong financials with the highest revenue CAGR of 22% and the 2nd largest EBITDA margin of 25%
• Market leader in same store sales at 18% vs. Artizia at 9.80% and Nike at 6%
• Extremely strong ROIC of 40% which is attributed to continue to reinvestment in the business
LULU is a high multiple stock that deserves a premium because of strong fundamentals and further growth opportunities
11/18/2019 McMaster Investment Council 17DCF Model Assumptions
Assumptions
WACC Calculation Multiple Method
US Treasury 1.87% EBITDA Multiple 19.6x
Expected market return Last forecast EBITDA 1,944
8.6%
Terminal value 38,099
Market risk premium 6.76% Present value of terminal value 24,649
Country Risk Premium 6.66% Terminal value as % of Enterprise Value 86.7%
Beta 1.10 Present value of forecast FCF 3,767
CAPM Cost Of Equity 9.30% Forecast period as % of Enterprise Value 13.3%
Cost of debt Enterprise Value 28,416
1.7%
Debt (hardcode as of valuation date) 698
Tax rate 28.0% Cash (hardcode as of valuation date) 624
After Tax Cost Of Debt 1.22% Equity Value (Market Cap) 28,342
Debt-to-total Capitalization 97.50% Shares outstanding 123
Equity-to-total Capitalization 2.50% Current Price (as of valuation date) 198.02
Fair Value Share Price 230.42
WACC 9.10% Upside 16.4%
Free Cashflow Valuation
($ in millions of U.S. dollars except per share amounts) Projection Period
Free Cash Flows 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E
Revenues 1,797 2,061 2,344 2,649 3,288 3,847 4,501 5,132 5,747 6,437 7,016
Growth Rate 15% 14% 13% 24% 17.0% 17.0% 14.0% 12.0% 12.0% 9.0%
Total COGS (883) (1,063) (1,145) (1,250) (1,472) (1,731) (2,026) (2,258) (2,529) (2,832) (3,087)
% of Revenue 49% 52% 49% 47% 45% 45% 45% 44% 44% 44% 44%
Total SG&A (538) (628) (778) (904) (1,110) (1,289) (1,485) (1,693) (1,874) (2,092) (2,280)
% of Revenue 30% 30% 33% 34% 34% 34% 33% 33% 33% 33% 33%
Total EBIT 376 369 421 495 706 827 990 1,180 1,345 1,513 1,649
Less: Tax (EBIT * Tax Rate) (109) (111) (131) (143) (198) (232) (277) (330) (377) (424) (462)
Less: Capital Expenditures (120) (143) (150) (158) (226) (277) (300) (345) (380) (420) (450)
Add: D&A & Non-Cash Expenses 58 73 88 108 122 155 184 209 245 260 295
Less: Change in working capital and other (4) 63 (4) (33) (106) (14) (17) (56) (73) (80) (59)
209 510
Free cash flows to the firm (FCFF) 125 233 334 487 614 770 906 1,009 1,091
Cost of capital 9.1% 9.1% 9.1% 9.1% 9.1% 9.1%
PV Free Cash Flows to the Firm (FCFF) - 481 556 639 689 704 697
EBITDA 442 509 603 828 974 982 1,174 1,390 1,590 1,773 1,944
11/18/2019 McMaster Investment Council 18DCF Model: Sensitivity Analysis
Results
EV/EBITDA Multiple
16.6x 18.1x 19.6x 21.1x 22.6x
8.1% 208.56 224.62 240.68 256.74 272.80
WACC
8.6% 204.09 219.79 235.48 251.17 266.86
9.1% 199.74 215.08 230.42 245.75 261.09
9.6% 195.51 210.50 225.49 240.48 255.47
10.1% 191.39 206.05 220.70 235.35 250.00
EV/EBITDA Multiple
16.6x 18.1x 19.6x 21.1x 22.6x
8.1% 5.3% 13.4% 21.6% 29.7% 37.8%
WACC
8.6% 3.1% 11.0% 18.9% 26.9% 34.8%
9.1% 0.9% 8.6% 16.4% 24.1% 31.9%
9.6% -1.3% 6.3% 13.9% 21.5% 29.0%
10.1% -3.3% 4.1% 11.5% 18.9% 26.3%
Target Price of $230 with 16.4% upside
11/18/2019 McMaster Investment Council 19Risks & Catalysts
Risks
Risk Probability Evaluation
• This economic cycle has been fueled the resilient North American consumer, a low interest rate environment and historically low
Consumer Spending
unemployment levels.
Decline
• Any change in these factors may impact discretionary income
• Companies with a strong brand presence must keep up with the latest fashion trends to remain competitive. Unattractive designs and faulty
Fashion Trends
products will negatively impact reputation
Sourcing Inflation & Tariff • Currently has experienced minimal impact from Chinese tariffs although vendor movement into Southeast Asia poses a risk to increasing
Pressure sourcing costs
New Top Line • CEO McDonald and CFO Guido have only been with LULU for 1 year and have yet to be tested. Operational execution, brand momentum, and
Management the domestic retail environment were already strong when both joined
Catalysts
Catalyst Probability Evaluation
• Management provided guidance above analyst expectations for revenue and EPS results
Q3 Earnings
• Consistent trend of earnings beats
Teenage Brand Perception • Shown continued share gains in Piper Jaffray’s brand awareness survey, a proven indicator for brand momentum
Growing • #1 Fashion trend for women (leggings) and #7 overall female and male preferred apparel brand
• Already started rolling out personal care products across 50 stores and have seen success
Category Expansion
• Footwear line set to complement core product offering
Supply Chain Exposure • Company has little exposure to China vs competition Relatively safer from tariffs compared to the marketplace
Collectively, the catalysts driving Lulu’s business outweigh the potential risks, which are primarily macro trends
11/18/2019 McMaster Investment Council 20Questions?
Appendices
DCF Assumptions
Assumptions
2020E 2021E 2022E 2023E 2024E 2025E
Revenue 17% 17% 14% 12% 12% 9%
COGS (% of Revenue) 45% 45% 44% 44% 44% 44%
SG&A (% of Revenue) 34% 33% 33% 33% 33% 33%
CAPEX (% of Revenue) 7% 7% 7% 7% 7% 7%
D&A (% of Revenue) 4% 4% 4% 4% 4% 4%
11/18/2019 McMaster Investment Council 23Category Expansion
Large category expansions complements core products
SelfCare – Personal Care Products
• Rolled out across 50 stores
• Deodorants, moisturizers, shampoo, lip balm
• Launched after successful test run earlier on this year
• Partnership to sell items through Sephora
• Worked with athletes throughout its rigorous two-year
R&D process
Footwear
• Positions the corporation for strong long- term growth
opportunities
• Already conducted a year long trial run with APL
• It is currently in the pipelines as it is in the R&D stages;
analysts believe it will drive long term growth prospects
11/18/2019 McMaster Investment Council 24You can also read
