Group Assignment Lululemon vs Athleta - Financial Analysis

1 Group Assignment: Lululemon Financial Analysis FNCE 623: Financial Management June 21 st of 2023

2 Table of Contents Executive Summary ................................................................................................................................... 2 Introduction ............................................................................................................................................... 3 Lululemon Ratio and Trend Analysis ...................................................................................................... 4 Liquidity ratios ...................................................................................................................................... 4 Analysis of Liquidity Ratios ..................................................................................................................... 4 Analysis of the Solvency Ratios ............................................................................................................... 5 Efficiency Ratios .................................................................................................................................... 5 Analysis of the Efficiency Ratios .............................................................................................................. 6 Profitability Ratios ................................................................................................................................ 6 Analysis of the Profitability Ratios ....................................................................................................... 6 Lululemon Financial Situation ................................................................................................................. 7 Common-size Balance Sheet and Income Declaration Analysis ......................................................... 7 Lululemon’s Financial Position Comparison with Athleta ............................................................... 10 Industry Ratio Comparisons .................................................................................................................. 10 Peer group analysis .............................................................................................................................. 11 Brand Positioning and Strategy ...................................................................................................... 11 Financial Performance .................................................................................................................... 11 Market Presence and Expansion .................................................................................................... 12 Recommendations ................................................................................................................................... 12 Appendix .................................................................................................................................................. 15

4 traditionally positioned itself as a luxury brand, commanding higher price ranges (Cruz, 2020). In contrast, Athleta provides more affordable alternatives without compromising on quality. Lululemon has effectively capitalized on this tendency by delivering high-performance attire that combines style and functionality (Grabner, 2019). Lululemon's triumph can also be credited to its robust brand identity and community involvement. The company fosters a feeling of belonging through various initiatives, such as sponsoring fitness events and collaborating with influencers and ambassadors (Brahim, 2022). In recent times, Lululemon has broadened its product offerings beyond conventional sportswear. It has ventured into new categories, such as menswear and self-care products, expanding its customer base. The company has also embraced online commerce and established a strong internet presence, enabling customers to shop from anywhere conveniently (Cruz, 2020). The company has committed to reducing its environmental impact by employing sustainable materials, implementing ethical sourcing practices, and investing in recycling and waste reduction initiatives. This dedication resonates with customers who prioritize environmentally friendly brands. Lululemon Ratio and Trend Analysis Liquidity ratios Liquidity ratios help identify whether a company can settle its short-term obligations using its available liquid assets. (We need to explain where the information comes from and the period, we are using the information from) Table 1: Liquidity ratios Short-Term Solvency (liquidity) Jan 31/19 Jan 31/20 Jan 31/21 Jan 31/22 Jan 31/23 Current Ratio 2.8558 2.9141 2.4054 1.8607 2.1173 Quick Ratio 2.0469 2.0783 1.6725 1.1729 1.1474 Cash Ratio 1.7610 1.7625 1.3027 0.8965 0.7739 Net Working Capital 0.4455 0.3619 0.2966 0.2447 0.2974 Interval Measure (days) 469.7982 494.5734 471.6521 419.4871 364.4833 Analysis of Liquidity Ratios As shown in Table 1 above, the company's current ratio was 2.12 in 2023, which represents the company's healthy financial status. Looking at the past five years, the company's

5 current ratio has experienced a decrease, with an increase experienced in 2023. This specifies a strong liquidity station, as the corporation has adequate current assets to encounter its short-term commitments. The company's quick ratio has experienced a decrease since 2020. However, the company has managed to maintain a positive and a higher quick ratio, as shown in Table 1 . This ratio provides a more conservative measure of liquidity, considering that inventory might not be easily converted to cash (Kliestik et al., 2020). Lululemon's quick ratio suggests that the company can cover short-term liabilities even after excluding inventory (Baalbaki et al., 2019). Based on the liquidity ratios, Lululemon demonstrates a strong liquidity position. Lululemon's cash ratio was 0.77 in 2023, representing a low cash ratio. This might mean the company has a low amount of cash to pay for its short-term liabilities. The company's net working capital ratio shows a decrease. This shows a decrease in the company's ability to repay its creditors. Solvency Ratios These are the ones in charge of measuring a company’s cash flows, assessing its capability to maintain its position in the market. It makes a comparison between cash flow capacity and liabilities (Hayes, 2023). Analysis of the Solvency Ratios Lululemon experienced a higher total debt ratio in 2022, which decreased in 2023. The decrease in the total debt ratio shows the company’s reduced dependency on debts to finance its activities. The debt/equity ratio was 0.78 in 2023, showing a positive shareholder's equity. The lesser the debt/equity ratio, the higher the shareholder's equity. The Times interest earned shows a decrease in 2023 compared to 2022, which shows the company's ability to meet interest payments.

7 accounting for all expenses, including operating expenses, borrowing costs, and taxes. Based on the profitability ratios, Lululemon demonstrates strong profitability; the gross profit margin of 55.39% indicates effective cost management and the ability to price products competitively while maintaining healthy margins. This is also supported by the high yield on possessions and return on equity ratios. Lululemon Financial Situation Common-size Balance Sheet and Income Declaration Analysis First, the company's financial position shows a decrease, as depicted by the decrease in the current and fixed assets As shown in Table 5. In 2019 the establishment's cash and cash equivalent was 42.28%, which decreased to 20.60% in 2023. The entire current properties decreased from 68.56% of the total assets to 56.35%, which shows a decrease in the firm's liquidity. The company's accounts receivable decrease an increase, showing its inefficiency in collecting customer debts. On the other hand, the current and fixed liabilities show an increase, which indicates an increase in the company's temporary and longstanding arrears. Retained earnings represent the company's profitability after paying overall its direct and indirect costs, income taxes and shareholders' dividends. Therefore, the decrease in retained earnings shows the company's inefficiency in its sales to ensure increased retained earnings. The shareholders' equity has also dropped greatly over the years, which shows a decreased ability to create value for the shareholders.

8 ASSETS Jan 31/19 Jan 31/20 Jan 31/21 Jan 31/22 Jan 31/23 Current Assets Cash 42.28% 33.32% 27.49% 25.49% 20.60% Accounts receivable 1.72% 1.23% 1.49% 1.56% 2.37% Inventories 19.42% 15.80% 15.46% 19.55% 25.81% Prepaid and receivable income taxes 2.37% 2.60% 3.32% 2.41% 3.31% Prepaid expenses and other current assets 2.78% 2.15% 2.99% 3.90% 4.26% Total Current assets 68.56% 55.10% 50.76% 52.91% 56.35% Fixed Assets Property,plant and equipment 27.21% 20.47% 17.82% 18.77% 22.64% Righ-of-use lease assets 0.00% 21.02% 17.56% 16.26% 17.29% Goodwill & intangible assets, net 1.16% 0.74% 11.16% 9.27% 0.82% Deferred Income tax assets 1.27% 0.96% 0.16% 0.12% 0.11% Other non-current assets 1.79% 1.71% 2.55% 2.67% 2.78% Total Fixed assets 31.44% 44.90% 49.24% 47.09% 43.65% Total Assets 100.00% 100.00% 100.00% 100.00% 100.00% LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable 4.58% 2.44% 4.12% 5.86% 3.08% Accrued liabilities and other 0.78% 3.63% 5.42% 6.69% 7.12% Accrued compensation and related expesnes 5.24% 4.07% 3.11% 4.15% 4.43% Current lease liabilities 0.00% 3.92% 3.97% 3.82% 3.71% Current income taxes payable 3.23% 0.81% 0.20% 2.71% 3.11% Unreedemed gift card liability 4.77% 3.67% 3.72% 4.21% 4.49% Other current liabilities 5.41% 0.38% 0.56% 0.99% 0.68% Total Current Liabilities 24.01% 18.91% 21.10% 28.43% 26.61% Fixed Liabilities Non-current lease liabilities 0.00% 18.63% 15.11% 14.00% 15.38% Non-current income taxes payable 2.02% 1.47% 1.03% 0.77% 0.51% Deferred income tax liabilities 0.68% 1.32% 1.40% 1.08% 0.98% Other non-current liabilities 3.93% 0.17% 0.21% 0.28% 0.36% Total Fixed Liabilities 6.63% 21.60% 17.76% 16.13% 17.23% Total Liabilities 30.64% 40.51% 38.87% 44.56% 43.84% Commitments and contingencies Stockholders equity Common Stock 0.03% 0.02% 0.01% 0.01% 0.01% Additional paid-in-capital 15.12% 10.84% 9.29% 8.55% 8.47% Retained earnings 64.61% 55.48% 56.06% 50.84% 52.19% Accumulated other comprehensive loss -10.40% -6.84% -4.23% -3.96% -4.50% Total shareholders' equity 69.36% 59.49% 61.13% 55.44% 56.16% Total liabilities and Stockholder's equity 100.00% 100.00% 100.00% 100.00% 100.00% Lululemon - Balance Sheet as of Jan 31, 2023

10 Lululemon’s Financial Position Comparison with Athleta Lululemon Financial Ratios Jan 31, 2023 Athleta Financial Ratios Jan, 2023 Current Ratio 2.11731486 1.418 Quick Ratio 1.14735846 0.68 Cash Ratio 0.773936837 -0.36 Net Working Capital 0.297350401 0.12 Inventory turnover 2.499834527 4.2934 Day's sales in inventory 146.0096643 85.01420785 Receivables turnover 61.02446842 0 NWC turnover 4.864593598 11.47 Fixed Asset turnover 3.313681854 2.306987738 Total Asset turnover 1.446488859 1.3715 Total debt ratio 0.43842025 0.4512 Debt/equity 0.780690987 0.822 Long-term debt ratio 0.234770003 0.4512 Gross Profit margin 55.39% 34.32% ROA 15.25% -1.77% ROE 27.15% -9.05% Industry Ratio Comparisons Lululemon Ratios Retail Industry ratios Current Ratio 2.405380342 1.27 Quick Ratio 1.672538265 0.61 Cash Ratio 1.302701154 0.32 Day's sales in inventory 121.9053681 56 Receivables turnover 70.54406321 9 Total debt ratio 0.388665576 0.68 Debt/equity 0.635765894 1.48 Times interest earned 4.555635597 7.72 Gross Profit margin 55.98% 4.70% ROA 14.07% 6.10% ROE 23.02% 14.00%

11 Comparing Lululemon's financial ratios and the retail industry it operates shows that the company is well-off. For instance, in 2021, the industry's current ratio was 1.27, while Lululemon's was 2.4. This indicates that Lululemon was placed higher in the industry, with higher efficiency in liquidity. This shows that Lululemon could effectively settle its short-term obligations without engaging in debts. The firm's quick ratio was also higher than the cash ratio. Therefore, as of 2021, the corporation was in a good financial place. Regarding efficacy, Lululemon was less efficient than most companies in the industry, as its days' sales in inventory and receivable turnover were higher than the industry's ratios. The receivable turnover represents the firm's capability to gather its credit or receivables from creditors in a timely manner. Therefore, having a higher receivable turnover ratio depicts inefficiency in how the company collects its receivables. The corporation's dates' trades in inventory were also higher than the industries, which shows a decrease in its ability to convert inventory into sales. Peer group analysis Brand Positioning and Strategy Lululemon has positioned itself as a high-end brand, concentrating on groundbreaking designs, technological textiles, and a combination of style and utility. The company highlights its community-building initiatives and provides a wide selection of sportswear for various physical activities (Diao, 2021). In contrast, Athleta is an inclusive and empowering brand for women. It aims to inspire a community of active women and offers a range of casual athletic and high- performance attire at comparatively more economical prices. Financial Performance Lululemon has demonstrated robust financial performance in recent years. The company has consistently achieved revenue growth and profitability. In fiscal year 2022, Lululemon reported total revenue of $6.0 billion, indicating a 35% increase compared to the previous year. As a Gap Inc. subsidiary, Athleta does not disclose separate financial statements (Mabry & Edwards, 2022). However, the company has witnessed substantial growth in recent years, with

13 operating expenses to improve cost efficiency and increase profit margins. The company also needs to increase productivity and ensure reduced costs. For instance, the company should work towards decreasing the selling and administrative expenses, which have greatly increased over time. References Baalbaki, S., Gilliard, D. J., & Hoffman, D. L. (2019). Is Lululemon Athletica's Turnabournd Sustainable?  American Journal of Management ,  19 (2), 26-39. Chaffey, M., Jacobitz, V., Levi, A., Olson, L., & Serpico, N. (2023). Athleta B Corporation Case Study. Cruz, M. D. C. A. F. D. G. (2020).  Equity research-lululemon athletica inc . Diao, Y. (2021, December). A Systematical Analysis Framework on Lululemon----High-end Professional Brand Image and Close to Life Promotion. In 2021 3rd International Conference on Economic Management and Cultural Industry (ICEMCI 2021)  (pp. 536- 541). Atlantis Press. Gap financial ratios for analysis 2009-2023: GPS. (n.d.). Macrotrends. https://www.macrotrends.net/stocks/charts/GPS/gap/financial-ratios . Hayes, A. (2023). What is a Solvency Ratio and How is it calculated? Investopedia. https://www.investopedia.com/terms/s/solvencyratio.asp#:~:text=A%20solvency %20ratio%20is%20a%20comprehensive%20measure%20of%20solvency%2C %20as,than%20only%20short%2Dterm%20debt . Hayes (2023). Profitability Ratios: What they are, common types, and how business use them. Investopedia. https://www.investopedia.com/terms/p/profitabilityratios.asp#:~:text=Investopedia

14 %20%2F%20Julie%20Bang-,What%20Are%20Profitability%20Ratios%3F,a %20specific%20point%20in%20time. Kliestik, T., Valaskova, K., Lazaroiu, G., Kovacova, M., & Vrbka, J. (2020). Remaining financially healthy and competitive: The role of financial predictors.  Journal of Competitiveness ,  12 (1), 74. Kosbab, H. J. (2021). Strategic Analysis of Lululemon Athletica, Inc. Luther, D. (2023). Top Efficiency Ratios: Operational, Assets, Inventory and More . ORACLE NETsuite . https://www.netsuite.com/portal/resource/articles/accounting/efficiency- ratios.shtml#:~:text=What%20Is%20an%20Efficiency%20Ratio,management%20and %20other%20business%20practices. Retail trade: Industry financial ratios benchmarking. (n.d.). https://www.readyratios.com/sec/industry/G/ . Yang, Y. (2022). Analysing Lululemon’s Localisation and Community Marketing Strategy in China in the Context of Globalisation. Studies in Social Science & Humanities, 1(3), 39- 56. Yang, Y. (2022). Analysing Lululemon’s Localisation and Community Marketing Strategy in China in the Context of Globalisation.  Studies in Social Science & Humanities ,  1 (3), 39- 56.

16 Jan 31/19 Jan 31/20 Jan 31/21 Jan 31/22 Jan 31/23 0.0000 0.5000 1.0000 1.5000 2.0000 Cash Ratio Figure : Cash Ratio Figure 4: Net working Capital Ratio Jan 31/19 Jan 31/20 Jan 31/21 Jan 31/22 Jan 31/23 0.0000 0.0500 0.1000 0.1500 0.2000 0.2500 0.3000 0.3500 0.4000 0.4500 0.5000 Net Working capital Ratio

17 Solvency Ratios Efficiency Ratios Jan 31/19 Jan 31/20 Jan 31/21 Jan 31/22 Jan 31/23 0.0000 0.0500 0.1000 0.1500 0.2000 0.2500 0.3000 0.3500 0.4000 0.4500 0.5000 Total Debt Ratio Jan 31/19 Jan 31/20 Jan 31/21 Jan 31/22 Jan 31/23 0.0000 0.1000 0.2000 0.3000 0.4000 0.5000 0.6000 0.7000 0.8000 0.9000 Debt/Equity Ratio Jan 31/19 Jan 31/20 Jan 31/21 Jan 31/22 Jan 31/23 0.0000 0.5000 1.0000 1.5000 2.0000 2.5000 3.0000 3.5000 4.0000 4.5000 5.0000 Times interest earned

19 Jan 31/19 Jan 31/20 Jan 31/21 Jan 31/22 Jan 31/23 0.0000 1.0000 2.0000 3.0000 4.0000 5.0000 6.0000 3.5404 3.3509 3.5465 5.1728 4.8646 NWC Turnover NWC Turnover Jan 31/19 Jan 31/20 Jan 31/21 Jan 31/22 Jan 31/23 0.0000 1.0000 2.0000 3.0000 4.0000 5.0000 6.0000 5.0170 2.7007 2.1360 2.6880 3.3137 Fixed Asset Turnover Fixed Asset Turnover

20 Jan 31/19 Jan 31/20 Jan 31/21 Jan 31/22 Jan 31/23 0.0000 0.2000 0.4000 0.6000 0.8000 1.0000 1.2000 1.4000 1.6000 1.8000 1.5774 1.2127 1.0518 1.2659 1.4465 Total Asset Turnover Total Asset Turnover Profitability Ratios. Jan 31/19 Jan 31/20 Jan 31/21 Jan 31/22 Jan 31/23 54.00% 54.50% 55.00% 55.50% 56.00% 56.50% 57.00% 57.50% 58.00% Gross Profit Margin