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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