Free Essay: Organizational Context and Financial Analysis of the Lululemon Company

The company is a Canadian retailer and designer that deals with technical athletic apparel, and it operates in Australia and North America. Its yoga-inspired apparel is mainly marketed via the Ivivva and Llululemon Athletica brands. Its products are primarily designed for offering performance, comfort, and fitness and incorporates style and function in its design. The company offers athletic apparel and accessories for men, women, as well as female youth. The assortment of these products includes fitness tops, jackets, shorts, and pants that are meant for healthy lifestyle activities, including general fitness, running, and yoga. Its heritage of combining style and performance addresses female athletes needs, as well as the growing core pf consumers who desire casual wear consistent with active lifestyles. The company also aims at broadening is product range to those of male athletes and female youth. According to the 2014 annual report, the companys branded apparels were sold through 254 stores located in Canada, US, New Zealand, and Australia (United States Securities and Exchange Commission, 2014). In addition, the company also provides yoga services, which are mainly administered through sessions led by local instructors. It also has a guest education center for its customers, which is a forum where they can provide feedback, as well as asking questions about its services and products.

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Lululemon has thrived from its distinctive community-based strategy that enhances the brands guest loyalty. Its key elements is combining style and performance for designing and developing its apparels, locating its stores in lifestyle centers, street locations, and malls, creating an educational and inviting store environment that encourages client product trials thereby guaranteeing repeat visits, as well as marketing to the grassroots levels of each community, including via social networks. As reported in the annual report, through the strategy, the company has managed to increase its net revenues from $40.7 million in 2004 to $1.6 billion in the fiscal year 2013, which represents a 50% compound annual growth rate (United States Securities and Exchange Commission, 2014).

The market for its products, which is technical athletic apparel is highly competitive. For this reason, competitor size and their amount of resources can allow them to compete more effectively, which can lead to a loss of Lululemons market share, and hence, a reduction in profitability and net revenue. These competitors, unlike Lululemon, have international recognition, and include Nike, Inc., The Gap, Inc., Under Armour, Inc., and Adidas AG. For this reason, competition is a major definer of business decisions because they have greater brand recognition, a broader set of suppliers, greater financial stamina, store development, distribution, and marketing among other resources. In addition, as opposed to these bigger competitors, the company does not own any patents or intellectual property rights in fabrics, technology, or processes that underlie its products. However, the company has several trademarks that include its logo, apparel designs, products, and fabric names, and thereby, the company is able to mitigate any possibility of imitation of its brands. Customers recognize Lululemon as a premium brand that offers quality apparels and accessories, especially for yoga products that are differentiated from its major competitors. According to Road Less Invested (2012), it has a strong reputation, especially with its suppliers due to its close working with the design team.

The company has incorporated a strong inventory management for its outbound logistics, where only a limited amount of specific designs reach the stores to create artificial scarcity for its products, thereby enticing its customers to purchase them quickly. For employees to be competent, the company has invested in human resource management through training and encouraging them to develop connections with the clients on a personal level. Moreover, the company offers student internships using the Make Your Mark program (United States Securities and Exchange Commission, 2014). The business level strategy is built upon differentiation, by concentrating on consumer segment that is concerned with fitness and health. As such, the company preaches a pursuit of happiness by enjoying life, emphasizing on friendship, being active, and goal-setting. It also creates ambassador programs by offering free yoga classes, as well as emphasizing on operational sustainability. For this reason, the company, the corporation is eco-friendly, which leaves the company to be in a secure market position and ensuring that it is unique. Also, its corporate-level strategy where it gains market power by engaging multi-point competition with firms that produce sporting goods has enabled it to compete favorably in the market. It also incorporates an international strategy by incorporating stores in various locations, including New Zealand, North America, and Australia with showrooms located in Asia, Europe, and North America has enabled it to have a global recognition (United States Securities and Exchange Commission, 2014). In essence, this is enabled by its strategy to ship its products to areas that the company is yet to establish stores such as the Middle East, Latin and America, and Africa. The standard products and branding are consistent in the regions where the firm has established itself, where it capitalizes on overreaching themes of positivity and fitness to reach all customers rather than to specific local markets. Its cooperative strategy calls for the company to partner with community businesses, as well as athletic teams in providing valuable marketing opportunities for its products. In addition, Lululemon is sizeable enough with a marketing power that allows it to address competitive challenges while also ensuring that its operations are in full control.

With its presence in the different markets, this affects the financial information through harmonizing the books of accounts. For instance, the company has to make currency conversions to ensure that the financial data does not vary, but can be measured from the same baseline. Also, enough monetary muscle has to be injected in each of these regions to ensure that all its business subsidiaries are equally growing to enhance its profitability. However, each decision, especially financial, has to be approved by the board. By doing so, central decisions are effectively made, which addresses the accountability issues.

Recent Financial Performance

Consolidated Income Statements

Revenues

As showcased by the income statement, in the appendix, the revenues can be surmised as follows:

Financial Year Jan 2014 Jan 2015 Jan 2016

Revenues USD 1,591,000,000 USD 1,797,000,000 USD 2,061,000,000

The graph and table clarifies that the revenues have been increasing over the last three years, which signifies a substantial growth. In essence, increased revenues means that the profitability of the firm has increased.

Operating income

From the income statement, the operating income has been declining in the last three years. For instance, the 2014 financial year had a USD 391 million, which dropped to USD 376 million and plunged further to USD 369 million. As such, this means that the revenues are not enough or the company has increased overhead expenses over the three years.

Net Profit/Loss

From the income statement, the company made profits over the last three years. However, less profit was made in the 2015 financial year, but this was increased in the 2016 financial year. Therefore, the company is consistent in making profits, hence its financial position is good.

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)

This is calculated by subtracting expenses from revenues. However, the expenses must exclude amortization, interest, depreciation and taxes. EBITDA, as shown in the graph below, has always been high in the last four years. For this reason, the profitability of the firm has been unquestionable. The company has been making profits, and this owes to the fact that the revenues have increased over the same period.

Cash Flow Statements

From the cash flow statements, it is clear that the net income has been reducing over the three years. For instance, it reduced from USD 280 million in the 2014 financial year to USD 239 million in the 2015 financial year but slightly increased in the 2016 financial year to USD 266 million. As such, this inconsistency might signify a struggling company. The profits have never been consistent with Lululemon, but the profits have always been there. As such, despite the inconsistency in profitability, the company has managed to ensure that it is profitable.

As shown in the cash flow statement, he inventory has always been negative in the last three years.

However, as asserted earlier, this is a strategy that the company uses to ensure that its stock moves quickly. The company, from its stock in the various selling points ensures that there is artificial scarcity, and thus, whenever the company restocks, the items move quickly, hence making huge profits in the process.

In addition, the net cash from operating activities, just as the net income, has not been consistent in the three years, and thus, this shows that the company might be struggling financially as no improvements have been noted in the three years. For instance, the net cash provided by the operating activities increased from USD 278 million in the 2014 financial year to USD 314 million in the 2015 financial year. However, the net cash flow from investing activities, as shown in the cash flow statements from the tree years has been negative, thereby evidencing the fat that the company has been heavily investing, which is not a bad thing for the company. For instance, the company made losses in the three years, in 2014, it invested USD 106 million, while in 2015 it invested USD 120 million while in 2016 Lululemon had invested USD 143 million. In essence, this is supported by the heavy investing, particularly in plant, equipment and properties. Investments for a company reveal that the company is willing to grow and expand not only financially but also geographically, which in itself stands to generate huge profits. For this reason, this is a sign that the company is performing well.

3. Analysis

The financial performance of the firm, even though a level of inconsistency has been observed, is good because the company has managed to ensure that the company is profitable over the last three years. However, the inconsistency can be attributed to different levels of investing that the company has engaged in in the period. In addition, the company has specified various risk factors that might affect the financial performance. These include, as pointed out in the annual report, a decline in sales and profitability due to the companys increase in product costs and a decrease in selling prices, the companys inability to anticipate changes in consumer preferences, inability to accurately predict customer demand of its products, as well as he fluctuating cost of raw materials (United States Securities and Exchange Commission, 2014).

C. Current Financial Health

According to Henry and Robinson (2015), the current ratio determines the efficiency of a company, as well as how liquid it is, thereby enabling the determination of how capable it is to pay off its short term liabilities using its current assets. The ration is calculated by dividing the current assets by the current liabilities. It is usually stated in numeric format. This can be simplified into the following formula

For Lululemon, thes...