The athleisure wear battle
Lululemon has developed what you might call a cult-like following. With lines of high end athleasure wear and focus building healthy communities, consumers are taking notice. Investors have as well, as of this writing (May 2018) stock prices have seen an 85% increase in the last year.
However, Lululemon faces stiff competition from both Nike and Under Armour who own large portions of the athletic wear market. As a stock investor, I was interested in seeing how Lululemon stood against it's competitors and how it might position itself for future success. I looked at the most recent Balance Sheet and Income Statements and ran the numbers.
Financial Indicators
Profitability
Return on Assets (ROA) measures how effective a company is using it's resources, while Return on Equity (ROE) indicates effective use of equity. Lululemon sits roughly in the middle of the pack in terms of profitability. It matches Nike in ROE likely because Lululemon has very little equity.
Risk
The Debt to Equity ratio is defined as a companies total liabilities divided by the stockholder equity. It indicates how much debt a company is leveraging to finance all of it's assets. Lululemon has a very low D/E ratio, 1/4 that of both Under Armour and Nike. Having such a low D/E indicates very low risk.
Liquidity
The Current and Quick Ratios compare debt to assets, varying slightly in what assets are included. Lululemon's ratios are nearly 1.5 to 2x the competition. Higher ratios indicate plenty of assets that can be liquidated in times of trouble to keep a business afloat or keep them from needing to take out more debt.
Result
Where Lululemon stands out is in it's low amount of debt. While this may seem like a major plus, such high Current and Quick Ratios and such low Debt to Equity ratios indicate that they aren't effectively using debt. Going forward, I would want to see this company take out some debt and really invest in something innovative that will boost profits and keep them relevant. This company seems very well positioned to invest in growth - and in this day and age, growth is everything.
But what should they invest in...? One direction they might choose is to get some more tech and partner with a smartwatch company or invest in their own line.
The case for smartwatches
Here are three reasons Lululemon might consider adding smartwatches to their stores.
1. Projected Market Growth
According to analyses by IDC and Statista by the year 2021, the wearables industry is expected to increase nearly 4-fold, with most of this growth led by smartwatch sales.
Top down analysis of the US smartwatch market resulted in a $2.26 billion dollar industry estimate (US Census Bureau, NPD). This analysis assumes that most consumers will replace their smartwatches on average every two years. A bottom up analysis resulted in an estimated $2.32 billion dollar industry (Forbes, Statista).
Do these numbers make sense? A quick reality check shows they do. Fitbit owns approximately 1/5th the smartwatch market. They had $2.2 billion in revenue in 2016 but only 1/6th of their products are smartwatches. Now lets assume each product produced equal revenue and do some quick math. $2.2 billion * (1/6 proportion smartwatches) = $0.36 billion. Multiply that by 5 since they own 1/5 of the market and $1.83 billion. We would expect this to be close to our market size analysis, and likely an underestimate as smartwatches are a more expensive item and may have produced a larger portion of Fitbit's revenue.
2. Competitive Advantage
Lululemon is known as a high end fitness gear store. Consumers interested in smartwatches to track their steps, workouts, sleep, and other health metrics are exactly who Lululemon is already marketing to.
Additionally, most smartwatch provide similar functions. Companies that shine in this market are those that have great design. Lululemon does great design. It's a great match.
3. Core Business
Smartwatches fit within Lululemon's core business and values, fitness and community. Smartwatches help track health metrics while also providing and outward statement about an individuals commitment to health and fitness. In addition, smartwatches have the added benefit of helping many individuals disconnect from their phones by filtering out notifications. This may seem counter intuitive, but smartwatches can actually enable users to feel more comfortable disconnecting from their phones which enables them to better connect with their peers.
Going Forward
Given Lululemon's positioning and financial indicators it will be interesting to see how they choose to invest going forward and grow the brand. They have made a name for itself and created a group of die-hard followers. The next step is investing in growth and expanding their following. It may be difficult to focus on growth and maintain their community based image. Focusing growth around high tech fitness equipment like smartwatches might be a great balance.
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