Spring 2023: Lululemon and Columbia

Deal Team

From: St. Louis, MO

Kelley School of Business|2026

Majors: Finance, Accounting

Minor: Psychology

From: Naperville, IL

Kelley School of Business|2026

Majors: Finance, Business Analytics

Minors: Economics, Political Science

Andrew Kuznetsov

Ela Taneja

I. Executive Summary

Executive Summary

Overview

Scope of Proposal

Strategic Assessment

• Lululemon is a multinational athletic apparel company specializing in high-quality yoga, running, and workout clothing for both men and women

• Lululemon is a leader in the athleisure market with a strong focus on community, sustainability, and innovative product design

• Lululemon's continuous growth and expansion into new product categories, as well as its acquisition of fitness technology companies, positions it well to acquire businesses in the athletic and wellness space

• This proposal will cover the outdoor wear and fitness equipment and accessory segment

• Lululemon's position as a market leader in the athleisure and performance apparel industry, combined with a growing focus on fitness and outdoor activity, puts it in an excellent position to acquire the company Columbia Sportswear

• Leveraging our expertise in the industry, we present a strategic investment opportunity for Lululemon to expand its presence in market by acquiring Columbia Sportswear and its subsidiaries.

• Lululemon's position as the market leader in performance apparel enables the acquisition of Columbia Sportswear to expand its product portfolio, enhance, and optimize its customer experience

• Lululemon's current focus and related products can be complemented by Columbia’s shared values and integration of diverse product range

• Acquiring Columbia will allow Lululemon to provide a seamless integration of experience and enhancing brand loyalty

Proposal

Given Columbia’s market placement, the FIR recommends the $6.3 B acquisition of Columbia Sportswear an offer price of $121.16 per share.

II. Company Overview

Company Overview

Background

• Lululemon Athletica designs, manufactures, and distributes high-end yoga and active lifestyle apparel, accessories, and footwear

• Founded in 1998, the company is headquartered in Vancouver, Canada, and has 574 stores worldwide with 427 locations in the United States

• Provides customers with high-quality, sustainable and fitness apparel that is both fashionable and functional

• Subsidiary: Mirror, an at home fitness technology company that grew in popularity during the pandemic

FIR

Growth Prospects

• Product Innovation: New products with focus on Core performance (Run, Train, Yoga and On the Move) as well as exciting opportunities in Play (Tennis, Golf and Hike) and new categories such as footwear, which was recently launched

• Customer Experience: Expansion of Like New, (resale/trade in program)

• Market Expansion: Following the success of e-commerce sales during peak pandemic and entry into Chinese markets, Lululemon has expanded into new countries across APAC and Europe

• Social Impact: Create a greater emphasis on mental health, inclusion, and environmental sustainability

Financial Performance

Financial Summary (USD, in mm)

Total Revenue: 8,110.52

EBITDA: 2,017.9

EBIT: 1,726.1

Net Income: 854.8

Capital Expenditures: (638.66)

Market Capitalization: 48,040.4

Total Enterprise Value: 47,955.4

Cash and ST Investments: 1,154.9

Total Debt: 1,070.3

Total Assets: 5,607

July 2001: IPO

June 2020: Acquisition of Mirror for $500 Million USD

January 2023: Nike files lawsuit against Lululemon for Flyknit technology in new running shoes

April 2023: Kortnitzer Capital Management increases investment in LULU by 23.4%

Lululemon’s Performance In Comparison to NASDAQ Stock Performance and Trading Volume (Nasdaq: LULU)

Company Overview FIR

Background Growth Prospects

• Columbia Sportswear designs, manufactures, and distributes outdoor and active lifestyle apparel, footwear, accessories, and equipment

• Founded in 1938, the company is headquartered in Portland, Oregon, and has over 4,0000 wholesale customers worldwide, with 138 outlet retail stores, 18 branded retail stores, and 4 brand specific e-commerce stores

• Provides customers with high-quality and sustainable outdoor and fitness apparel that can be used by anyone–regardless of level of experience

• Columbia Sportswear has three main subsidiaries: Sorel, Mountain Hardwear, and PrAna

• Sorel: High-quality outdoor and active-wear brand acquired in 2000

• Mountain Hardwear: Outdoor clothing and equipment brand acquired in 2003

• PrAna: Sustainable and trendy fitness and yoga apparel brand acquired in 2014

FIR

• Product Innovation: With emphasis on new active and athleisure products, Columbia has tapped into diverse consumer markets

• Online Sales: By investing in its e-commerce capabilities, more consumers have shifted to online shopping. Columbia’s e-commerce sales grew 40% in the second quarter of 2020, and this trend has continued as more consumers become comfortable with online shopping

• Social Impact: By partnering with brands that promote mental health and sustainability, Columbia will be able to promote its core values and consumer outreach

Financial Performance

Financial Summary (USD, in mm)

Total Revenue: 3,464.152

EBITDA: 546,103

EBIT: 428.704

Net Income: 311.44

Capital Expenditures: (58.47)

Market Capitalization: 5,550

Total Enterprise Value: 5,460

Cash and ST Investments: 589.8

Total Debt: 373

Total Assets: 2,889

Stock Performance and Trading Volume (Nasdaq: COLM)

March 1998: IPO

June 2020: Madhappy partnership to release mental health and fitness line

September 2022: Dude Perfect partnership to expand customer base

March 2023: NATIXIS Advisors increases investment in COLM by 25.3%

Columbia’s Performance In Comparison to NASDAQ

III. Industry Outlook

Industry Analysis

• The Sportswear/Active Wear Industry has a projected 2023 revenue of $338.29 billion, increasing by 5.9% from 2022

• The rise in athleisure and physical wellbeing, has made activewear and sportswear more popular and sustainable in relevance

• By 2026, the active wear industry is expected to generate more than $85 billion in the United States alone, with a compounded average growth rate of 6.4%

Consumer Trends

• 90% of Gen X Consumers are willing to pay at least 10% more on sustainable products

• 63% of shoppers purchased merchandise through social media

• With over 40.6K yoga and pilaties studios in the US and 95% of Millennials pursing fitness in their lifestyle, athleisure has become more popular

• 43% of American’s claim over half of their wardrobes are athleisure

VI. Strategic Recommendation

Strategic Recommendation

$1169.5M

37.4% $589.97M

Main Products:

1. Performance Apparel - High-quality, innovative clothing designed for comfort and protection in various outdoor environments.

2. Footwear - Durable and comfortable shoes for hiking, trail running, and casual wear in different terrains and conditions.

3. Accessories - Hats, gloves, scarves, and socks to enhance comfort and functionality during outdoor activities.

4. Outdoor Equipment - Tents, sleeping bags, and backpacks for camping, hiking, and other adventure activities.

FIR Strategic Recommendation FIR

Growing Interest in Outdoor Activities: A rising trend of consumers engaging in outdoor activities and adventures, driven by health and wellness awareness, presents a significant growth opportunity for companies like Lululemon and Columbia Sportswear.

Performance Catalysts

Athleisure Market Expansion: The continued growth of the athleisure market, fueled by consumer preferences for comfortable and versatile apparel, will support the demand for Lululemon's and Columbia's product offerings.

Focus on Sustainability: As consumer interest in sustainable and eco-friendly products increases, both Lululemon and Columbia can capitalize on this trend by developing and promoting environmentally responsible products and practices, further enhancing their brand value and appeal.

Revenue Synergies: Lululemon acquiring Columbia Sportswear will enable Lululemon to expand its presence in the outdoor and sportswear market. Columbia's established brand reputation in the outdoor segment will complement Lululemon's stronghold in the athleisure space, providing a comprehensive product offering for customers. Additionally, both companies can benefit from cross-selling opportunities, utilizing their combined retail presence and online platforms to reach a broader customer base.

Synergies

Potential Concerns & Mitigations

Cost Synergies: Lululemon and Columbia Sportswear, both being apparel and sportswear companies, will benefit from economies of scale post-acquisition. Operational efficiencies, including shared manufacturing facilities, raw material sourcing, and distribution channels, will reduce production costs. Consolidation of marketing efforts and retail operations will also lead to decreased marketing expenses and optimized retail presence. Finally, research and development costs will likely decrease as both companies share technology, materials, and product design expertise, accelerating innovation and reducing redundancies.

Concern: Resistance from Columbia Sportswear employees due to changes in leadership and corporate structure after the acquisition. Mitigation: Lululemon can ensure a smooth transition by retaining key Columbia Sportswear personnel and fostering open communication, promoting collaboration, and aligning incentives for both companies' employees.

Concern: Potential dilution of Lululemon's premium brand image by associating with Columbia, which targets a broader customer base. Mitigation: Lululemon can leverage Columbia Sportswear's expertise in outdoor apparel to develop premium products under the Lululemon brand, catering to customers seeking high-quality and fashionable outdoor gear.

VII. Valuation

Comparable Companies Analysis

Cost of Capital Breakdown

Football Field Analysis

Average valuation implies share price of $121.16

VIII. Strategic Alternatives

Strategic Alternatives

Strategic Alternatives

• Diversifies product portfolio by adding VF Corporation's brands, reaching new customer segments

• Leverages VF Corporation's global distribution, supply chain expertise, and retail partnerships for Lululemon's international expansion.

• Integration challenges due to differences in company culture, operations, and brand positioning, potentially causing inefficiencies or brand dilution.

• Lululemon may face difficulties managing its core business while integrating and overseeing a large organization like VF Corporation, impacting long-term growth.

• Adds On Running's innovative performance footwear, strengthening its position in the athletic market.

• Leverages On Running's technology, research and development capabilities, and global distribution channels to accelerate Lululemon's expansion into the performance footwear segment.

• On Running's premium pricing strategy may not align with Lululemon's broader customer base, potentially limiting market penetration and growth in the performance footwear segment.

• Competing against powerhouse athletic footwear brands, like Nike and Adidas, could make it challenging for Lululemon to quickly gain significant market share in the performance footwear space post-acquisition.

• Targets new customer segments in outdoor and casual wear by incorporating DOC's footwear brands.

• Leverages Deckers Outdoor Corp's established distribution channels, supply chain management, and marketing expertise to enhance Lululemon's operations and market reach.

• Potential integration challenges due to differences in company culture, product focus, and brand positioning, which could lead to inefficiencies or dilute Lululemon's brand identity.

• Managing and maintaining Lululemon's core business growth and innovation while integrating and overseeing Deckers Outdoor Corp could impact its long-term growth potential.