McMaster Investment Councilmac-ic.ca/wp-content/uploads/2020/02/Lulu-Deck-Final-.pdfat average of 5% since 2016 Personal spending increased by 3.9% in 2019 ... Nov -14 Nov -15 Nov

McMaster Investment Council

Lululemon (NASDAQ: LULU)

Consumer Goods Team

Consumer Goods Team

11/18/2019 McMaster Investment Council 2

Portfolio Manager Analyst Analyst Analyst

Graham Hodder Doris Feng Ryan Whitcher Marc Ferrari

Program: Honours CommerceYear: 4th

Prior Experience: Wells Fargo, TD Asset Management

Program: Honours CommerceYear: 3rd

Prior Experience: Sunlife Strategy

Program: Honours CommerceYear: 3rd

Prior Experience: TD Wealth, Market Research Intern

Program: Honours CommerceYear: 2nd

Prior Experience: Real Estate Investor, Beacon Hall Golf Club

I Industry Overview

Rise of E-Commerce

Industry Overview


The athletic apparel industry looks to continue growth at a faster rate than it has in the past

Key Trends Macro outlook

North America Specialty Apparel Revenue

Increase in Yoga and Athleisure demand Disposable Income per Capita

Market Share Athleisure Sector

Average 10% YOY revenue growth in the NA athletic wear segment since 2014

NIKE

ADIDAS

VF CORP

UNDERARMOURPUMA SE

LULULEMONATHLETICA

42%

30%

10%

6%6% 4%

Active/athletic revenue has grown +$1.6B over the past five years

Athletic brands should be +$21B larger in FY19 than in FY13 compared to traditional brands

Disposable income per capita increasing at average of 5% since 2016

Personal spending increased by 3.9% in 2019

Garment Spending

Increase in income and personal spending has driven spending in consumer discretionary and athleisure revenues upward

Digital and e-commerce has been a powerful driver of EBIT margin improvement.

Industry estimates ecommerce sales to double by 2023

0% 20% 40% 60%

280

300

320

340

2016 2017 2018 201940000

45000

50000

55000

2016 2017 2018 2019

% increase in ecommerce sales (2019)

Total yoga bottom wear market expected to reach $1.721 billion by 2021

Athletic wear is no longer limited to the gym and created a new category of “athleisure”

Increase interest in men's athletic wear has further boosted market segment

Industry Revenue Market Breakdown

Key Highlights Key Highlights

US median income increased to $63,179 in 2019

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2014 2015 2016 2017 2018 2019 2020E

LULU’s contribution to industry growth continues to increase

LULU has driven 25% of NA industry growth since 2015, only trailing Nike but crucially ahead of Adidas

Nike and Adidas expected to increase their market share by 3% by 2021

ETF Comparison


LULU is significantly outperforming the broad retail market as a whole

Index/Security Ticker

S&P/TSX SPY

S&P Retail ETF XRT

iShares Global Consumer Discretionary ETF RXI

Lululemon Athletica LULU

Nov - 14 Nov - 15 Nov - 16 Nov - 17 Nov - 18 Nov - 19

II Company Overview

McMaster Investment Council

Company Overview

Regulations in OntarioRegulations in Ontario

Lululemon Athletica Inc is a designer, distributor and retailer of athletic

apparel.

• Operate through two primary segments: Direct-to-Consumer and retail stores

• LULU #1 fashion trend amongst females and #7 overall preferred female apparel brand

• Founded in 1998 in Vancouver, IPO issued in 2007 at $14

• 440 company-operated locations worldwide across 14 countries, 80% of stores in North America

• Large focus on fostering a community that reflects a healthy lifestyle

• Known for unparalleled brand quality and comfortability across all product lines

Ticker(LULU:

NASDAQ)Enterprise Value

$27.15B

Share Price $205.91 P/E 51.4x

Market Cap $26.99B EV/EBITDA 30.8x

52 Week Low-

High

$110.71 -$205.91

EBITDA Margin 25.2%

Stores

65%

DTC

26%

Other

9%

US Canada Australia + NZ China Region Europe

Company Snapshot

Revenue Breakdown

Financial Snapshot

Retail Store Locations

Revenue by Geography Revenue by Segment

Canada 17%

USA 72%

Other 11%

11/18/2019 7

LULU’s has grown into an international athletic apparel powerhouse with a strong fundamentals

McMaster Investment Council 8

Chief Executive Officer COO & EVP, International Chief Product Officer Chief Financial Officer

Calvin McDonald Stuart Haselden Sun Choe Patrick Guido

Management Overview

Background:• CEO of Sephora’s America

for 5 Years (LVMH Owned)• EVP of Loblaws for 17 Years

Education:• Rotman MBA – University

of Toronto• Bachelor of Science from

Western University

Background:• CFO of Lulu for 5 years• CFO of J.Crew for 3 years• 20+ years in strategy &

operations roles at F500 retail companies

Education:• MBA from A.B Freeman

School of Business• Bachelor of Arts degree

from Auburn University

Background:• SVP Merchandising at Lulu• Various Management roles

in retail including, Guess, Levis & CPO at Marc Jacobs

Education:• Bachelor of Arts University

of Maryland

Background:• 7 Years at VF Corp. as VP of

Corporate Development & Treasury

• 15+ years in finance roles at F500 retail companies

Education:• MBA – Vanderbilt University• CFA Charterholder• B.Sc from Georgetown

University

LULU’s management team is focused on driving growth strategies while sustaining strong brand loyalty

11/18/2019

$0

$50

$100

$150

$200

$250

06-Jan-2017 06-Jan-2018 06-Jan-2019

9

1

Stock Performance

14.93%

8.49%

7.50%

4.29%

2.39%

Date Headline

Aug 2017 Restructuring of Ivivva brand, closed 47 out of 55 stores

Dec 2017Conclusion of a rapid retail expansion that saw over 40 retail locations added in F17

Jul 2018Loyalty program rollout in North America and New CEO Calvin McDonald

Mar 2019 $163M share buyback. Repurchased 1M shares

Apr 2019 Implemented “Power of Three” strategic plan

Sept 2019 2020 Q2 Earnings release

1

2

3

4

5

6

12

3

45

6

2 Year Stock Chart

Company History Largest Institutional Money Manager Ownership Stakes


Stock price has continued on an upward trajectory and isn’t done growing

LULU’s supply chain is currently diversified across several countries to mitigate changes in trade policy

Supply Chain Analysis


• 44 different manufacturers produce Lulu products

• They have recently convinced their largest supplier to build a manufacturing plant in Haiti to be closer to their largest consumer, North America

• Lululemon does not own or produce and of its fabrics directly

• Its trademarked “Luon” fabric is its largest fabric requirement, making up about 30% of the company’s total fabric use. The fabric is sourced from a single supplier

• The company has four distribution centers, located in Vancouver, Washington, Australia, and Ohio

• LULU’s transit time for online customers has fallen by 46%, averaging just under two days in the US

• LULU believes these distribution facilities should be enough to fulfil the company’s needs, including sales growth, over the next several years

• 460 stores worldwide

• Main retail in North America

• E-commerce business has seen steady growth

Raw Materials & Suppliers

Eclat textile

36.5% of COGS

Lenzing AG

<1% of COGS

Delta Galil

<1% of COGS

Li and Fung

<1% of COGS

Eclat Textile

Other suppliers

44%

LULU’s supply chain is currently underexposed to trade uncertainty due to a minimal 6% of sourcing from China

Manufacturer

Distribution

Brick & Mortar Retail + E-Commerce

Primary Supplier Overview

44%56%

LULU is heavily reliant on relationship with Eclat Textile as they are their primary

sourcing partner

Various

Manufacturers

Consumers

Supply Chain Overview and Process


Historical EBITDA Picture Free Cashflow Growing

Gross Margin & EBITDA Margin Comparable Store Sales

$197.40 $154.10

$236.90

$331.50

$517.00

$-

$100

$200

$300

$400

$500

$600

2015 2016 2017 2018 2019

CAGR of 17%

18%

7%6%

5%

1%

7%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

201820172016201520142013

48%

51%

53%

55%

44%

46%

48%

50%

52%

54%

56%

15%

17%

19%

21%

23%

25%

27%

2016 2017 2018 2019Gross margin EBITDA Margin

$434.40 $442.46 $508.58

$595.21

$826.84

$- $100 $200 $300 $400 $500 $600 $700 $800 $900

2015 2016 2017 2018 2019

Lulu has demonstrated resiliency and a strong ability to grow financial and operational metrics

Company Overview: Strong Fundamentals

Investment ThesesIII

Investment Thesis I – Strong Internal Capabilities Driving Growth


Sustainable Competitive Edges Strong Financial Metrics

Low Sales-to-Awareness

5-Year EPS CAGR5-Year Revenue CAGR

26.9%30.6%

18.0%15.5%

10.2%13.2%

21.0%

1. Highest revenue growth within the industry

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

25%

92%

70%

27%

Innovative, High Quality ProductsLulu constantly improves product quality through inventions such as new fabrics

Customer-centric ApproachLulu has placed customers at the heart of the

corporation by iterating products based on consumer feedback

Customer LoyaltyTheir products have garnered a “Community-

environment” as Lulu has translated co-created experiences into an effective

customer acquisition and retention strategy

22%

10% 8% 9% 8%4% 6%

Lulu’s sustainable competitive edges and strong performance have resulted in industry leading growth rates and margins

Continue to Grow Men’s Market

LululemonPractice

$148 annual fee

Personal development curriculum

Monthly classes hosted in local studios by LULU ambassadors

Member only development programs and events

Exclusive membership products

Investment Thesis II – Market Penetration Strategies


Introduction of the Loyalty Program Expand Omnichannel Offerings

In recent years it carries > 40% to contribution margin and has increased from 11% of revenue in FY12 (~$100M) to 26% in FY19 (>$850M)

Omnichannel offerings already lead to meaningfully results in KPIs: their Q4 results from 2018 showed that guest acquisition +30% and email file +70%

21%

79%

20% CAGR

Opportunity in

the next 5 years

Only 21% of business is

currently coming from men

Offering Highlights

Online only size and color

offerings

Innovated ‘buy online,

pick up in store

capabilities’

Mobile point of sale

capabilities to complete

purchase anywhere in

store

1

2

LULU has been able to balance in store with online sales as store traffic has risen the past quarters as

well – this is a balancing act which many competitors have accomplished

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

Current State

35% Growth in Q2 ’19

33%Growth in Q1 ’19

$1BAhead of Schedule in reaching

Sales Target

Future StateOpportunity

Lululemon already enjoys their status as the ‘Starbucks’ of athleisure

The loyalty program could add over $700M in incremental sales

Men’s athleisure

segment projected

to grow at a CAGR

of 20% over the

next five years

Double revenue in the next 5 years

Double breadth and segment offerings

Increase the amount of targeted campaigns

1

2

3

Expanding in the men’s, loyalty program, and digital segment will continue to penetrate markets currently served

Investment 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

U.S.

Australia

& New Zealand

Asia

28 are located in China

EuropeCanada

292

64

43

38

23

Current State Future State

A favorable channel mix, logistical

savings (closer to sourcing base),

stronger store traffic/productivity, and

greater full-price selling creates an ideal

investment landscape

China is expected to be bigger than the

rest of Lulu’s international business by

FY24

Key driver behind 33% increase in

revenue in the Asia-Pacific region Operate 150 stores by FY24

There is currently >40% annual square

footage growth and bigger in $ than

Europe

Management is focused on international

sales reaching 25%

Large and successful partnership with T-

mallLaunch their own e-commerce site

Sporting Goods Market Size 2015 2016 2017 2018

Global (PFC Estimates -Billions) $ 265 $ 282 $ 298 $ 315 North America $ 97 $ 102 $ 106 $ 110 Western Europe $ 38 $ 41 $ 43 $ 44 Greater China $ 28 $ 31 $ 35 $ 39 Other $ 102 $ 108 $ 115 $ 121

Estimated Growth Rates (PJC)

Global (PFC Estimates) 6.20% 6.50% 5.80% 5.40%North America 5.00% 5.00% 4.00% 4.00%Western Europe 5.00% 6.00% 5.00% 3.00%Greater China 12.00% 12.00% 12.00% 12.00%Other 6.30% 6.60% 5.90% 5.60%

Population (Billions)

Global 7.383 7.467 7.550 7.643North America 0.356 0.356 0.361 0.364Western Europe 0.448 0.449 0.450 0.451Greater China 1.397 1.404 1.410 1.415Other 5.182 5.256 5.330 5.413

Retail $ Per Capita

Global $ 36 $ 38 $ 40 $ 41 North America $ 272 $ 284 $ 293 $ 303 Western Europe $ 86 $ 91 $ 95 $ 98 Greater China $ 20 $ 22 $ 25 $ 28 Other $ 20 $ 21 $ 22 $ 22

Expansion Plans have Garnered Wins Already Future Expansion Strategies

Q3 ‘18 Q4 ‘18 Q1 ‘19 Q2 ‘19

added >505 in combined comps

china e-commerce comp over 200%

Opened first store in Stockholm, Sweden

+ 10% store comp

+61% Asia Market growth

+50% EMEA Market Growth

Opened first store in Osaka Japan

Hosted first Sweatlife in Berlin

>70% Growth in Asia

39% Revenue Growth in Internationally

34% Revenue Growth in Internationally

68% market share growth in China

Q2 ‘18

International growth, mainly fueled by China has opened up additional markets for expansion opportunities

ValuationIV

Company Comparable Analysis


Public Comparable Analysis

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

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/ AthleisureUnder 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 29.2xAdidas 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 23.6xAritzia 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 24.0xMean $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 BrandsAmerican 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 10.2xLevis $6,746 $6,845 3% 12% 37% 4.6x 4.6x 10.9x 10.3xMean $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

DCF Model Assumptions


Assumptions

Free Cashflow Valuation($ in millions of U.S. dollars except per share amounts) Projection PeriodFree Cash Flows 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025ERevenues 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)

Free cash flows to the firm (FCFF) 209 125 233 334 510 487 614 770 906 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

Multiple MethodEBITDA Multiple 19.6xLast forecast EBITDA 1,944

Terminal value 38,099Present value of terminal value 24,649Terminal value as % of Enterprise Value 86.7%Present value of forecast FCF 3,767Forecast period as % of Enterprise Value 13.3%Enterprise Value 28,416Debt (hardcode as of valuation date) 698Cash (hardcode as of valuation date) 624Equity Value (Market Cap) 28,342Shares outstanding 123Current Price (as of valuation date) 198.02Fair Value Share Price 230.42Upside 16.4%

WACC CalculationUS Treasury 1.87%

Expected market return8.6%

Market risk premium 6.76%Country Risk Premium 6.66%Beta 1.10

CAPM Cost Of Equity 9.30%Cost of debt 1.7%

Tax rate 28.0%

After Tax Cost Of Debt 1.22%Debt-to-total Capitalization 97.50%Equity-to-total Capitalization 2.50%

WACC 9.10%

DCF Model: Sensitivity Analysis


Results

WAC

CEV/EBITDA Multiple

16.6x 18.1x 19.6x 21.1x 22.6x

8.1% 208.56 224.62 240.68 256.74 272.80

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

WAC

C

EV/EBITDA Multiple16.6x 18.1x 19.6x 21.1x 22.6x

8.1% 5.3% 13.4% 21.6% 29.7% 37.8%

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

Catalyst Probability Evaluation

Q3 Earnings • Management provided guidance above analyst expectations for revenue and EPS results• Consistent trend of earnings beats

Teenage Brand Perception Growing

• Shown continued share gains in Piper Jaffray’s brand awareness survey, a proven indicator for brand momentum • #1 Fashion trend for women (leggings) and #7 overall female and male preferred apparel brand

Category Expansion • Already started rolling out personal care products across 50 stores and have seen success• 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

Risk Probability Evaluation

Consumer Spending Decline

• This economic cycle has been fueled the resilient North American consumer, a low interest rate environment and historically low unemployment levels.

• Any change in these factors may impact discretionary income

Fashion Trends • Companies with a strong brand presence must keep up with the latest fashion trends to remain competitive. Unattractive designs and faulty products will negatively impact reputation

Sourcing Inflation & Tariff Pressure

• Currently has experienced minimal impact from Chinese tariffs although vendor movement into Southeast Asia poses a risk to increasing sourcing costs

New Top Line Management

• CEO McDonald and CFO Guido have only been with LULU for 1 year and have yet to be tested. Operational execution, brand momentum, and the domestic retail environment were already strong when both joined

Risks & CatalystsRisks

Catalysts

Collectively, the catalysts driving Lulu’s business outweigh the potential risks, which are primarily macro trends


Questions?

Appendices

DCF 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%

Assumptions

Category Expansion


Large category expansions complements core products

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

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

Documents

McMaster Investment Councilmac-ic.ca/wp-content/uploads/2020/02/Lulu-Deck-Final-.pdfat average of 5% since 2016 Personal spending increased by 3.9% in 2019 ... Nov -14 Nov -15 Nov