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Lululemon Athletica: Pitching an IPO
By going public, a company is able to raise capital quickly by reaching numerous
investors. Capital raised can be used to expand business in various ways. Another
benefit is the reputation of being listed on a major stock exchange, it can increase the
popularity of the stock when it does IPO.
A company might not go public because of time and expenses of going through the long
process. They would have to pay for financial services, underwriting fees, filing fees, etc.
Lululemon wants to expand business because they wanted to drive sales and capital
expenditures (p.5). Increasing store networks would make their capital budget more
efficient as they can just repeat store designs, and their brand could drive better lease
terms and leasehold improvements could be purchased in bulk (p.5). Strengths include
high quality, unique fabric that release substances into the skin, designed to reduce
irritation (p.2), employee satisfaction as their employee turnover was 20% per year
which is lower than industry average, and capitalization on first-mover advantage (p.3).
Future risks include revenue growth slowing down because of competitors gaining
traction (p.5), and selling and administrative expenses rising to 35% per year (p.5).
Lululemon had the first-mover advantage and paved the way for competitors such as
Aritizia and Roots, who based their yoga-inspired clothing from Lululemon (p.3). Serious
competitors were large companies such as Nike and Ralph Lauren. However, they did
not fear competition because they believed in their innovative new products (p.4).
In the case, the yield curve is inverted meaning that it could be a possible sign of a
coming recession. This could delay a company from going public because stocks
become less attractive during recessions.
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7. Owner’s portions of ownership don’t get diluted with debt issue. Interest is also tax
deductible. Interest coverage and Interest coverage + Principal calculations are in excel
sheet. They are both very high and considered negligible debt.
8. My recommendation is for Lululemon to do a debt issue to raise capital because this way
the ownership of the firm doesn’t get diluted, and since they have a high interest
coverage ratios it indicates they are financially sound enough to repay debt and interest
obligations.