Investment Proposal - Lululemon

 

TO: Clark Hansen

FROM: Donovan Econn, Research & Development

DATE: October 21, 2022

SUBJECT: Investment Opportunity: Lululemon Athletica (LULU)


For my weekly investment proposal, I propose that we don’t invest in the global apparel retailer Lululemon Athletica (“the company” or “Lululemon”). I will examine the following:

  1. Definitions of Terms

  2. Business Overview

  3. ESG Impact and Goals

  4. Criticism

  5. Final Recommendation


Definitions


I will use the following terms and their definitions throughout the memo to define the type of company in which AMDP looks to invest.


Triple Bottom Line (TBL)

  • The triple bottom line theory represents a shift from the traditional corporate focus of only profits to a commitment to equally prioritizing profits, people, and the planet. A company can adhere to the TBL theory by devoting resources to address its social and environmental impact on immediate and global communities. (Miller)

Corporate Social Responsibility

  • Like the TBL, corporate social responsibility is a policy that a company adopts to commit itself to positively contributing to improving its communities, the economy, and the environment. By practicing corporate social responsibility, a company takes steps towards adopting the triple bottom line approach to business. (Reckmann)

Social Enterprise

  • A social enterprise is a business with the primary objective of creating a significant positive societal impact. Many social enterprises achieve this while also focusing on profits to fund and expand their social objectives. (CFI)

Carbon Footprint

  • A company’s carbon footprint is a measure of the level of greenhouse gases that its operations produce, either directly or indirectly. Companies can aim to reduce their carbon footprint to work towards goals of corporate social responsibility and achieving the triple bottom line. One can measure a company’s carbon footprint by taking the frequency with which a company performs the activity and multiplying it by the amount of greenhouse gases it produces. (Collins) 

  • Activities that contribute to a company’s carbon footprint are defined as being controlled by the company directly or indirectly (Scope 1 & 2) or being influenced but not controlled by the company (Scope 3).  (Collins) 

  • Considering this metric when weighing a company’s level of corporate social responsibility is important because it helps quantify how a company can negatively affect the environment.


Business Overview


The Business

Lululemon is an activewear company that designs, distributes, and sells high-end clothes and gear globally. They currently operate over 574 stores and employ roughly 29,000 people. (lululemon.com) The company began in 1998 in Vancouver, British Columbia, and opened its first store in 2000. Lululemon has since carved out a niche in the fashion industry by promoting its products as conducive to an active and healthy lifestyle. This strategy allowed the company to create a new submarket in the fashion industry and sell its clothes at a premium while marketing to higher-income consumers. 


Revenue

The company’s two biggest revenue channels are direct-to-consumer sales and sales from company-operated stores, which comprise 44% and 45% of the company’s revenue, respectively. The other 11% comes from the company’s smaller endeavors like temporary stores and its subscription-based MIRROR workout equipment. 


Market Share

Lululemon currently has about a 5.2% market share of the sportswear industry among competitors like Under Armor, Columbia, and Adidas, according to csiwatch.com. (CSI)


Valuations

In July 2017, the company underwent an IPO, selling $327.6 million worth of shares which implied a market capitalization of $1.24 billion. In the following years, the company has grown immensely. Lululemon’s market cap currently sits at around $37.49 billion, and the stock price is more than 16 times higher than its IPO price. 


Growth

In 2018, the company implemented a “Power of Three” growth strategy. They aimed to grow by expanding in three main ways:

  • Product Innovation: Expanding the men’s section of the clothing line.

  • Omni Channel Experience: Enhancing online customer experience while boosting revenue by providing events and memberships as products.

  • Market Expansion: Plans to quadruple revenue by 2023 by expanding the brand across China, Southeast Asia, and Europe.


They met their 5-year goals in three years by doubling their revenue from Fall of 2018. Last year, at their investor meeting, they announced a similar 5-year plan in which they plan to double revenues again by 2026.





ESG Impact and Goals


According to Lululemon’s 2021 impact report, the company’s impact agenda has three pillars:

  • Be Human: This pillar includes diversity, equity, inclusion efforts, and fair labor practices for the benefit of the people who make the products.

  • Be Planet: This part of the agenda focuses on using clean energy, responsible consumption and production, and climate action.

  • Be Well: At the intersection of the previous two, the “Be Well” pillar promotes the physical, mental, and social well-being of the community.


Lululemon has taken many steps to achieve the goals listed above. In 2021, they addressed their “Be Human” goal by having pay equity for their US employees for the 5th year in a row. They also launched the lululemon Centre for Social Impact, which invested $11.9 million to support their goal of providing access to well-being tools to 10 million people by 2025.


In efforts to make a positive impact on the planet, the company has also claimed to procure 100 percent renewable electricity to power its owned facilities. Their men’s products are made with more than 75% sustainable materials, and the company has a goal of 100% sustainable materials by 2030. Similarly, they have committed to promoting the “Like New” section of their website and stores to keep products in use longer and reduce waste. (lululemon.com, Impact Highlights)


As a result of the company’s steps to become more socially and environmentally responsible, CSR Hub has given Lululemon an ESG ranking of 79, which is significantly higher than the industry average of about 73. (CSR Hub) 


Criticism


Acting on their goals: 

Good On You is a website that provides ethical ratings for fashion brands. Relating to environmental impact, the website notes that Lululemon doesn’t provide any data or updates on its progress in meeting its goal of reducing greenhouse gas emissions by 60% by 2030. 

While the brand does promote DEI initiatives in the US, they haven’t given any evidence of doing the same for its global supply chain. Good On You also claims that the company sources its final stages of production in places with extreme risk of labor abuse, and it has been linked with sourcing cotton from regions of China that are at risk of using Uyghur forced labor. (Wolfe)


Ties to greenhouse gases: 

Lululemon has recently come under significant scrutiny for working with suppliers that use coal, a non-renewable resource that produces greenhouse gas, according to insiderclimatenews.org. They note how 95% of Lululemon’s emissions came from these third-party manufacturers. Lululemon’s supply chain consists of manufacturing plants in 14 countries and raw material suppliers in 18. Their pledge to use clean energy and their goal of using 100% renewable energy only applies to their US manufacturing, leading to critics and environment activists calling its ESG claims misleading. (McKenna)  



Final Recommendation: Don’t Invest


I do believe Lululemon would prove to be a profitable financial investment. Still, I cannot confidently recommend an investment due to their failure to show the high levels of corporate social responsibility that AMDP expects. Nevertheless, it would be difficult for a large multinational fashion manufacturing company to become as profitable as Lululemon has without prioritizing profit over environmental causes somewhere along the way.


Even though Lululemon hasn’t yet addressed its use of third-party pollutive manufacturing plants, they have taken steps to become a more sustainable company by taking a triple bottom line approach to their business model.. I believe they will continue in those efforts as ESG principles become increasingly important to investors today. 


While my final recommendation is currently not to invest, I think Lululemon’s response to the recent backlash regarding its ties to coal use will cause the company to take a more environmentally cautious approach to its manufacturing. If this happens and the company remains financially strong, I will recommend investing.




















Works Cited


Collins, Paul. “Business Carbon Footprint: Calculate, Reduce and Report.” Selectra, 18 Jan. 2022, https://climate.selectra.com/en/business/carbon-footprint. 

“Company ESG Risk Rating - Sustainalytics.” Sustainalytics.com, https://www.sustainalytics.com/esg-rating/lululemon-athletica-inc/1042003440. 

“ESG Ratings Information for Lululemon Athletica.” CSRHub, https://www.csrhub.com/CSR_and_sustainability_information/lululemon-athletica. 

Gelsi, Steve, and MarketWatch. “Lululemon Athletica IPO Jumps 50%.” MarketWatch, MarketWatch, 27 July 2007, https://www.marketwatch.com/story/clothing-maker-lululemon-rallies-50-raises-328-mln. 

“History of Lululemon Athletica in Timeline - Popular Timelines.” Populartimelines.com, https://populartimelines.com/timeline/Lululemon-Athletica. 

Jaffer, Aamir. “Lululemon Stock: A Wonderful Business at a Fair Price.” SeekingAlpha, Seeking Alpha, 9 Aug. 2022, https://seekingalpha.com/article/4531900-lululemon-stock-wonderful-business-fair-price. 

Kodas, Michael. “Lululemon's Olympic Challenge to Reduce Its Emissions.” Inside Climate News, 21 Apr. 2022, https://insideclimatenews.org/news/04022022/carbon-bomb-lululemons-olympic-emissions-clothes-manufacturing/. 

“Lululemon Athletica Inc. Filed This 8-K on 21 April 2022.” SEC-Show, https://otp.tools.investis.com/clients/us/lululemon_athletica1/sec/sec-show.aspx?Type=html&FilingId=15742399&CIK=0001397187&Index=10000. 

“Lululemon's Coal Pollution.” Stand.earth, 14 Sept. 2022, https://www.stand.earth/lulucoal. 

Miller, Kelsey. “The Triple Bottom Line: What It Is & Why It's Important.” Business Insights Blog, 8 Dec. 2020, https://online.hbs.edu/blog/post/what-is-the-triple-bottom-line. 

“Product Sustainability.” Lululemon, https://shop.lululemon.com/story/product-sustainability. 

Reckmann, Nadia. “Corporate Social Responsibility.” Business News Daily, https://www.businessnewsdaily.com/4679-corporate-social-responsibility.html. 




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