Lululemon-Athletica-Pitching-an-IPO

SwW11256LULULEMONATHLETICA:PITCHINGANIPO1KenMarkwrotethiscaseunderthesupervisionofProfessorsJamesE.HatchandLarryWynanttoprovidematerialforclassdiscussion.Theauthorsdonotintendtoillustrateeithereffectiveorineffectivehandlingofamanagerialsituation.Theauthorsmayhavedisguisedcertainnamesandotheridentifyinginformationtoprotectconfidentiality.RichardIveySchoolofBusinessFoundationprohibitsanyformofreproduction,storageortransmissionwithoutitswrittenpermission.Reproductionofthismaterialisnotcoveredunderauthorizationbyanyreproductionrightsorganization.Toordercopiesorrequestpermissiontoreproducematerials,contactIveyPublishing,RichardIveySchoolofBusinessFoundation,TheUniversityofWesternOntario,London,Ontario,Canada,N6A3K7;phone[phone];fax[phone];[e-mail]©2011,RichardIveySchoolofBusinessFoundationVersion:2011-11-07INTRODUCTIONItwaslateMarch2007,andRichardMcDonald,amanagingdirectoratFederalSecurities(Federal),wasbriefinghisteamonafinancingproposalforLululemonAthletica(Lululemon).FederalSecuritieswasamid-sizedinvestmentbankandinrecentyears,hadmanagedseveralcapitalissuesforbusinessesintheretailsector.McDonaldhadbeenmonitoringLululemon’sprogressoverthepastfewyearsandhadbeenimpressedbythecompany’suniquepositioninganditsrapidgrowth.Hefeltitmightbetimelytoapproachthefirmwithaproposaltoraisenewfundsthroughaninitialpublicoffering(IPO)oradebtissue.McDonaldfeltthereweretwosignificantreasonsforpitchingLululemononafinancingproposal.First,raisingfundsthroughastockofferingwouldallowthecompany’sfounder,DennisWilson,andthetwoprivateequityfirms,AdventInternationalandHighlandCapitalPartners,torealizethevaluetheyhadcreatedbysellingsomeshares.Second,newfinancingwouldprovideLululemonwithenoughcashtocarryoutitsimmediateplanstoopenmorestoresintheUnitedStatesandCanada.Lululemonwasarapidlygrowingdesigner,manufacturerandretailerofpremium-pricedyogaathleticwear.Infiscal2007,eightyearsafterWilsonhadstartedthecompany,Lululemonearnedanetincomeof$11million2fromrevenuesof$149million.3TheU.S.andCanadianAthleticApparelMarketAccordingtotheNPDGroup,aresearchfirm,theU.S.athleticapparelmarketwasworth$47billionin2007,about10timesthesizeoftheCanadianathleticapparelmarket.4Althoughathleticclothinghadinitiallybeendevelopedtomeettheneedsofathletes,changesinconsumertasteshadincreasedtheappealofathleticclothing,inturnattractingawideraudiencewhosemembersofteninsistedonstyleaswellasfunction.Inresponsetothisgrowingdemand,largeapparelcompanies,suchasNike,focusedon1Thiscasehasbeenwrittenonthebasisofpublishedsourcesonly.Consequently,theinterpretationandperspectivespresentedinthiscasearenotnecessarilythoseofLululemonAthleticaoranyofitsemployees.2AllfiguresinU.S.dollars.3AllofLululemon’sfinancialinformationistakenfrom“LululemonAthleticaInc.,FormS-1/A—SecuritiesRegistrationStatement,July9,2007.”Competitors’financialinformationistakenfromtheirrespectiveSECfilings.4SujataShekarandMichaelShilsky,“LululemonAthleticaInc.,”CIBCWorldMarkets,p.7.FortheexclusiveuseofZ.XIANGThisdocumentisauthorizedforuseonlybyZhenyuXianginFall2012CorporateFinancingHBSCoursePackagetaughtbyHeather-AnneIrwinfromSeptember2012toDecember2012.Page29B11N012designingstylishclothingfromtechnicalfabricsthatcouldrepelrain,allowperspirationvapourtoescape,andwickmoistureawayfromskin.AppareldesignswereoftendevelopedintheUnitedStatesandEuropeandwereusuallymanufacturedinlow-costcountries,suchasChina,HondurasandVietnam.Asnewapparellineswereconstantlybeingintroduced,advertisingstoodoutasthekeytodrivingsales.Athleticapparelwassoldthroughmassmerchandisers,departmentstoresandspecialtygoodsstores.Somebrand-namefirms,suchasNike,hadtheirownstores.Womenpurchasedmorethan80percentofathleticapparel,andsomeofthefastestgrowingathleticapparelcategoriesinvolvedlow-impactgroupsportsandactivitiessuchaswalkingandyoga.Competitioninthemarketwasincreasingashigh-endfashionbrandssuchasRalphLauren,PradaandTommyHilfigerstartedtointroduceathleticapparelintotheirlineups.LULULEMONATHLETICAChipWilsonhadbeeninvolvedintheapparelindustrysince1979,settinguphisfirstLululemonAthleticastoreinthetrendyVancouverneighbourhoodofKitsilano.Toattractcustomers,Wilsonbeganhisoperationsbystockingthestorewithwell-knownbrandedapparel,inadditiontothenewlydesignedLululemonproducts.Ascustomersbrowsedthestore,WilsonsoughtfeedbackonLululemon’sfirstdesignprototypes.Hehadlocatedhisdesignstudiointhemiddleofthestoresoprototypescouldbealteredonthespot.Wilsonbuiltupasmallline-upofclothing,producingpiecesinsmallbatchesinordertominimizerisk.Thetop-sellingitemwastheLululemonpant,madefromform-fittingLycra.Lululemonofferedfeminine,high-qualityclothingthatfitmostbodytypes.Thetargetconsumerwasanearly30sprofessionalwomanwhowaswelleducatedandhadsignificantdisposableincome.Wilsonreliedonhiscontactsinthefabricindustrytoprocurefabricsforhisactivewear.TofurtherdifferentiateLululemon’sproducts,WilsondevelopedproprietaryfabricssuchasSilverescent,Vitasea,andLuon.Silverescentincorporatedsilverparticlesbecauseofitsanti-bacterialproperties.Vitaseawasafabricd