A. Success Factors and Risks.

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One of the strategic priorities of the company is increasing its revenues using the community-based strategy. The company has thrived from the strategy as it has enhanced the brands guest loyalty. 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). For this reason, this is poised to affect business decisions regarding growth. For instance, one of Lululemons strategic moves is to expand in the North American market. Therefore, increased revenues will determine whether the company has enough capital for investing in more stores. Increased profitability also will affect the business decisions by influencing the management into investing into more stores and products. In addition, the business level strategy, which is built upon differentiation, by concentrating on consumer segment that is concerned with fitness and health affects the manufacturing and supply chain decisions. The company has to ensure that the differentiated products are of heist quality. In essence, in 2013, 17% of the products in stores were recalled, therefore, to prevent this, they have to put in place a well-functioning quality control measures to curb non-quality and ensure that the integrity is not compromised (Larcker, Larcker, & Tayan, 2014). In essence, through the observance of quality, increasing revenues, and investing options, the companys success will be improved.

Also, Lululemon 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). They have capitalized on online sales to expand the market and improve the profits. These countries use different currencies, and thus, this affects the financial procedures used. In essence, the company, owing to globalization, has adopted the non-GAAP financial measures primarily because there are changes in total comparable sales and dollars. The Non-GAAP measures are effective as they enable the company to have a greater insight into revenue growth rates and excluding the impact of changing foreign exchange rates.

As pointed out in the annual report, the company faces various risks including 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). The companys long-term and short-term approach to mitigating these risks include the use of social media to market its products, as well as analyze consumer preferences which are implemented in during the manufacture of the next products. Also, the various risks have been documented in the annual reports to ensure that investors are knowledgeable of the risks before investing in the company. Lululemon is also implementing a supply chain management system to ensure that quality raw materials are used in fabricating the products. Also, they ensure that competent managers are hired.

The company faces fierce competition from include Nike, Inc., The Gap, Inc., Under Armour, Inc., and Adidas AG, which have international recognition and better market share compared to Lululemon. Lululemon has capitalized on differentiation strategy. However, to increase sales and revenues, the company might consider diversifying into other products, such as athletes boots, socks, football apparels, and even into basketball kits. In essence, this will promote more revenues because the company will still be able to earn more profits in this diversification besides the differentiated yoga products. According to Chang and Lee (2016), business diversification increases a companys revenue and its profitability. Also, following the decreased quality and recalls in 2013, the quality of the products should be improved via quality checks to increase loyalty and satisfaction (Jahanshahi et al., 2011). Also, the company needs to establish a Standard Operating Procedure for the risks mentioned in the annual reports.

The most significant risks for Lululemon, as reported in the annual report is its inability to anticipate consumer preferences and to successfully introduce and develop innovative products. In addition, material disruptions within the companys information systems disrupt the business, thereby reducing sales. The raw materials price fluctuate often and it also has limited brand recognition compared to the competitors international recognition.

B. Projections

The projections were qualitative, and thus, were based on market research from reputable financial reporting entities, such as Yahoo Finance and X-Finance. Considering the performance of Lululemon in the last five years, as shown in Appendix A, they have been inconsistent. For instance, cash flows from operating activities were high in 2015 but fell significantly in 2016. However, this was attributed to the 2013 recalls which led to significant losses. However, since the firm rectified that, the cash flows, as shown in Appendix B are expected to increase significantly. This is attributed to the strategies the company has adopted, including its internationalization strategy. The cash flows, as shown in Appendix B were on a discounted basis. As such, the Discounted Cash Formula (DCF) was used in making the calculations. The formula is as follows:

The DCF is based on present value calculations. The present value is derived as follows:

According to DCF projection, as shown in Appendix B, growth rates were 12.86% for 2016, the current year, and were projected to fall 14.69%, 14.70%, 13.73% in 2017, 2018, and 2019 respectively. Even so, the revenues roses from 2016 at USD 2,061 billion to USD 2,364 billion, USD 2,689 billion, and 3034 billion for 2017, 2018, and 2019 respectively. As such, the company is poised to increase its revenues, and will continue to generate more sales, and hence, signify more profitability in the next three years.

Various assumptions have been used in making the projections. For instance, the above-mentioned risks have to be mitigated, and the company has to expand in the whole of North America, especially Canada and the USA regarding the number of stores. Another assumption is that the company will not face any stiff competition from Nike, Inc., The Gap, Inc., Under Armour, Inc., and Adidas AG in the yoga products, which are the main source of income for Lululemon. In addition, the companys reputation and integrity will not be compromised by non-quality products in the future. Also, the company will provide counter measures for each of the risks mentioned in the annual report. Also, the demand for yoga products will not fall in the near future, thereby guaranteeing sales that will generate the increased revenues.

Modifying the projections reveals that the company will also show that the company earnings per share, as well as revenues will increase significantly. The worst and best projections are revealed by the low and high estimates. In 2017, as shown in Appendix C, the Earnings per Share (EPS) ratio for the best scenario is 2.25 while the worst is 2.05. Additionally, as revealed in Appendix D, the revenues are projected to grow significantly. The best scenario for 2017 is USD 2.42 billion, while the worst scenario is USD 2.06 billion. As such, based on the above assumptions, the company is generally expected to grow significantly, which is further proved by Appendix E, where the company growth estimates are above the sector, and industry growth rate estimates.

C. Effect of Assumptions and DCF

These assumptions, forecasting methodology, and information gaps affect your projections in terms of accuracy. The projections may not be accurate, but provide a general preview of how they can be estimated. These projections are subject to present marketplace conditions which can change anytime. Also, legal, economic, technological, political, and social factors are information gaps that may change in future. However, if these will not change, the projections are achievable. These projections are not aggressive and are based on the performance of Lululemon, as well as how experts in the field have made projections. The forecasting methodology, DCF, gives analysts a good idea of the current year and the following one, but beyond that, its capability in making forecasts diminishes significantly, meaning that the accuracy is negatively impacted. The projections are in line with the companys growth priorities concerning geolocation and revenues. On the other hand, changing the assumptions will diminish affect the projections negatively. Specifically, it would result in overestimation, thereby making them less useful. As such, using the current assumptions will promote the relevance of the estimates.

References

Chang, H. Y., & Lee, A. Y. P. (2016). The relationship between business diversification and productivity: considering the impact of process innovation at different corporate life cycles. Technology Analysis & Strategic Management, 1-14.

Jahanshahi, A. A., Gashti, M. A. H., Mirdamadi, S. A., Nawaser, K., & Khaksar, S. M. S. (2011) Study the Effects of Customer Service and Product Quality on Customer Satisfaction and International Journal of Humanities and Social Science, 1(7), 253-260.

Larcker, D. F., Larcker, S. M., & Tayan, B. (2014). Lululemon: A Sheer Debacle in Risk Management. Rock Center for Corporate Governance at Stanford University Closer Look Series: Topics, Issues and Controversies in Corporate Governance and Leadership No. CGRP-41, 14-21.

United States Securities and Exchange Commission. (2014). Lululemon Athletica Inc.: Form 10-K (Annual report). Retrieved from http://files.shareholder.com/downloads/LULU/0x0x766923/AC87B033-1A64-47B5-9DAE-978862EF7D81/2013_10K.pdf

X-Fin. (2016). Intrinsic value of lululemon athletica (LULU) - X-FIN.com. X-fin.com. Retrieved 20 June 2016, from http://x-fin.com/stocks/usa/LULU.

Yahoo Finance. (2016). LULU Analyst Estimates | lululemon athletica inc. Stock - Yahoo! Finance. Finance.yahoo.com. Retrieved 20 June 2016, from https://finance.yahoo.com/q/ae?s=LULU

Appendix

A. Cash Flows. Source: Morningstar Financials (2016)

B. Cash Flow Projections. Source: X-Fin (2016)

14.69, 14.70, 13.73, 12.86

2061, 2364, 2689, 3034

C. Earnings Estimates (Yahoo Finance, 2016)

D. Revenue Estimates (Yahoo Finance, 2016)

E. Growth Estimates (Yahoo Finance, 2016)

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