Lululemon Athletica Harvard Case Solution & Analysis

  • Marketing

Lululemon Athletica separates itself from its rivals with restrictive fabric and many attire plans. A key to achievement will be the capability of the organization to consistently lead innovative work of new fabrics and outlines. The organization can rapidly react to the quickly advancing market through the utilization of focus groups and in-store studies. Likewise it has settled itself as having a fantastic item and (at any rate in Canada) a well-known brand.

lululemon case solution

lululemon case solution

Whether this same level of brand mindfulness may be implicit to the United States remains an open inquiry. One of the key achievement variables determines from the organization's first-mover advantage, in spite of the fact that competitors appear to be progressively ready to react rapidly to new Lululemon Athletica’s plans.

The clothing market in the United States remains at $47 billion, or 10 times the span of the Canadian market. Lululemon Athletica has 38 stores in Canada and just 17 stores in the United States, which recommends that there is sufficient an opportunity of growth in the U.S. Moreover, the organization has not yet soaked the Canadian market. With $150 million in sales in a $4.7 billion market, Lululemon Athletica has only three percent of the business for sports clothing in Canada and number of competitors are increasing as they are entering into the business sector in Canada. Rivalry originates from Roots, which is a well-known Canadian retailer, and from more modest focused yoga-dress organizations. Furthermore, Lululemon Athletica confronts rivalry from significant firms, for example, Nike, Polo Ralph Lauren, Hanesbrands and VF Corp. These organizations have corporate stores along with outsider merchants and they likewise have the assets to create and dispatch new lines of item. Accordingly, while the potential for growth does exist still there are risks associated which need to be considered.

VALUATION

Book Value:

The book value of Lululemon Athletica’s equity is $37.4 million in 2007. However, the market value of its equity is likely to be considerably higher. The excel sheet data shows that competitors are trading at a wide range of market-to-book multiples. The highest ratio is of Nike that is a multiple of 8.6. If this multiple is applied to Lululemon Athletica, then it suggests a value of over $320 million.

Discounted Cash Flows:

The methodology to be utilized here is the "free cash flow to the firm" technique. When everything is said in done, then this approach requires recognizing the free cash flow accessible to all sources of capital, discounting those cash flows to the present at the weighted average cost of capital, and deducting the benefit of extraordinary debt. The result is the aggregate estimation of the firm's value.

To process the cost of capital, it is important to gauge the company's optimal capital structure. There is little debt in the firm at present; notwithstanding, the data proposes that 20% debt is viewed as optimal by Federal, so that is the target which will be utilized within this valuation approach. U.S. 10-year treasuries are yielding 4.56 per cent. The excel data suggests that, in the case it wants to raise debt, Lululemon Athletica will likely pay a rate that is appropriate for an A rated corporate bond. The interest rate is 6.25% on debt. Assuming a 30 per cent tax rate, the after-tax cost is 6.25 × .7 or 4.38 per cent.

The capital asset pricing model  can be used to come up with an approximate of the cost of equity capital. The risk-free rate typically used is the long-term U.S. Treasury bond yield, which is given in the excel sheet is 4.68%. The market premium can be very controversial as it is assumed to 5%. The company will likely look at the betas provided for comparable companies in order to come up with an estimate of the beta. The average beta of the three comparators is 1.01......................................

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