Lululemon Athletica_Pitching an IPO

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W11256 LULULEMON ATHLETICA: PITCHING AN IPO1

Ken Mark wrote this case under the supervision of Professors James E. Hatch and Larry Wynant to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality.

Richard Ivey School of Business Foundation prohibits any form of reproduction, storage or transmission without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Richard Ivey School of Business Foundation, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail cases@ivey.uwo.ca. Copyright ? 2011, Richard Ivey School of Business Foundation Version: 2011-11-07

INTRODUCTION

It was late March 2007, and Richard McDonald, a managing director at Federal Securities (Federal), was briefing his team on a financing proposal for Lululemon Athletica (Lululemon). Federal Securities was a mid-sized investment bank and in recent years, had managed several capital issues for businesses in the retail sector. McDonald had been monitoring Lululemon’s progress over the past few years and had been impressed by the company’s unique positioning and its rapid growth. He felt it might be timely to approach the firm with a proposal to raise new funds through an initial public offering (IPO) or a debt issue. McDonald felt there were two significant reasons for pitching Lululemon on a financing proposal. First, raising funds through a stock offering would allow the company’s founder, Dennis Wilson, and the two private equity firms, Advent International and Highland Capital Partners, to realize the value they had created by selling some shares. Second, new financing would provide Lululemon with enough cash to carry out its immediate plans to open more stores in the United States and Canada.

Lululemon was a rapidly growing designer, manufacturer and retailer of premium-priced yoga athletic wear. In fiscal 2007, eight years after Wilson had started the company, Lululemon earned a net income of $11 million2 from revenues of $149 million.3

The U.S. and Canadian Athletic Apparel Market

According to the NPD Group, a research firm, the U.S. athletic apparel market was worth $47 billion in 2007, about 10 times the size of the Canadian athletic apparel market.4 Although athletic clothing had initially been developed to meet the needs of athletes, changes in consumer tastes had increased the appeal of athletic clothing, in turn attracting a wider audience whose members often insisted on style as well as function. In response to this growing demand, large apparel companies, such as Nike, focused on 1 This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives presented in this case are not necessarily those of Lululemon Athletica or any of its employees.

2 All figures in U.S. dollars.

3All of Lululemon’s financial information is taken from “Lululemon Athletica Inc., Form S-1/A — Securities Registration Statement, July 9, 2007.” Competitors’ financial information is taken from their respective SEC filings.

4 Sujata Shekar and Michael Shilsky, “Lululemon Athletica Inc.,” CIBC World Markets, p. 7.

designing stylish clothing from technical fabrics that could repel rain, allow perspiration vapour to escape, and wick moisture away from skin. Apparel designs were often developed in the United States and Europe and were usually manufactured in low-cost countries, such as China, Honduras and Vietnam. As new apparel lines were constantly being introduced, advertising stood out as the key to driving sales. Athletic apparel was sold through mass merchandisers, department stores and specialty goods stores. Some brand-name firms, such as Nike, had their own stores. Women purchased more than 80 per cent of athletic apparel, and some of the fastest growing athletic apparel categories involved low-impact group sports and activities such as walking and yoga. Competition in the market was increasing as high-end fashion brands such as Ralph Lauren, Prada and Tommy Hilfiger started to introduce athletic apparel into their lineups.

LULULEMON ATHLETICA

Chip Wilson had been involved in the apparel industry since 1979, setting up his first Lululemon Athletica store in the trendy Vancouver neighbourhood of Kitsilano. To attract customers, Wilson began his operations by stocking the store with well-known branded apparel, in addition to the newly designed Lululemon products. As customers browsed the store, Wilson sought feedback on Lululemon’s first design prototypes. He had located his design studio in the middle of the store so prototypes could be altered on the spot. Wilson built up a small line-up of clothing, producing pieces in small batches in order to minimize risk. The top-selling item was the Lululemon pant, made from form-fitting Lycra. Lululemon offered feminine, high-quality clothing that fit most body types. The target consumer was an early 30s professional woman who was well educated and had significant disposable income. Wilson relied on his contacts in the fabric industry to procure fabrics for his active wear. To further differentiate Lululemon’s products, Wilson developed proprietary fabrics such as Silverescent, Vitasea, and Luon. Silverescent incorporated silver particles because of its anti-bacterial properties. Vitasea was a fabric developed from a seaweed compound. According to Lululemon, it released amino acids, minerals and vitamins directly into the skin. Luon was a fabric that wicked away moisture, was flexible and was designed to reduce irritation.5

The design process included gathering extensive customer feedback through the use of focus groups and in-store surveys. Lululemon maintained a research-and-development room at its headquarters, where hundreds of potential product designs were stored. Clothing destined for North American stores was manufactured in two independent facilities in Vancouver in which Lululemon had a minority equity stake. Having a design facility, stores and a manufacturing facility located near headquarters meant that Lululemon could make last-minute changes to product designs and alterations to production levels, depending on sales volume. To reduce shipment time and product costs, clothing destined for Asia-Pacific stores was produced in China by Lululemon’s Vancouver manufacturing partners.

Clothing designs were manufactured in small batches — about 1,000 pieces per batch — and inventories at the store level were checked and replenished every 45 days. There was a testing period when new products were launched. If products sold well, they were added to the regular lineup.

Lululemon’s success allowed Wilson to add stores across Canada, the United States, Australia and Japan. By 2007, the company operated 59 retail stores in total. Seven of these stores were owned by franchisees 5Lululemon Athletica Inc., Form S-1/A — Securities Registration Statement, July 9, 2007, p. 88.

(see Exhibit 1). Lululemon garments were also made available at wholesale prices to retailers in non-competing territories.

Stores were typically 2,500 square feet in size and located near other high-end retailers that were targeting the same customer group. For example, Lululemon stores could be found on main shopping streets, in higher-end malls next to retailers such as Banana Republic, The Gap, and even Gucci and other specialty retailers such as organic food markets.

Lululemon employed 650 part-time and full-time workers in its stores. Employees were hired based on their customer service orientation and attitude. Retail floor employees were called “educators,” and their goals were to greet customers with a smile, provide cheerful advice and educate the consumer on the technical aspects of each garment. These educators were even encouraged to tell guests when a garment they were trying on did not fit the way it was designed to or when it was unflattering to the customer. Lululemon paid its retail employees an hourly wage 30 per cent higher than the minimum wage offered by most retailers. Management was encouraged to deal with staff on a transparent basis and incorporate employee input wherever possible. Lululemon’s part-time employee turnover was about 20 per cent per year, considerably lower than the retail industry average of over 50 per cent.

To promote its stores and products, Lululemon relied on word-of-mouth advertising and on local endorsements. Each store appointed a “community educator” who recruited about six brand ambassadors for the store. Ambassadors were selected based on their level of connection and prominence in the local athletic community; they were given free clothing to wear, but they did not have any formal requirement to promote the brand. In stores, photographs featuring these local ambassadors were prominently displayed. In addition, Lululemon held selected events to draw crowds to its stores. For example, in Vancouver, Lululemon gave away free clothing to the first few people who showed up naked at a new store opening. Due to its growing popularity, Lululemon’s products were a favourite topic for local and national media outlets, garnering free publicity for the firm. The company typically spent one per cent of sales on marketing.

Competitors

Lululemon capitalized on its first-mover advantage to expand rapidly. The company had been uniquely positioned in the market before its success caught the attention of Canadian retailers. Several competitors started to augment their product line with look-alike clothing. For example, retailers like Aritzia and Roots — both Canadian firms — added yoga-inspired clothing that was loosely based on Lululemon’s designs. Aritzia was based in Vancouver and had 55 stores mainly in Canada (with six stores in the United States). Aritzia’s yoga apparel, which was developed to augment its product line-up, seemed to copy style elements from Lululemon’s collection. As a Canadian retailer that sold outdoor-style clothing such as sweatshirts, cargo pants and jackets, Roots had 120 stores in Canada, the United States and Asia. It too had recently added a small section of yoga-inspired clothing.

Lululemon also competed against several other, smaller, yoga-clothing retailers, such as Kharma Athletics, Lotuswear and Tonic. Kharma Athletics started up in 2002 in Vancouver as a manufacturer of yoga clothing that was fashionable and colourful. Lotuswear was founded in 2004 and differentiated its brand from those of its competitors by promoting a particular focus on environmental and social consciousness. Tonic was founded in 2004 and created fashionable yoga clothing. None of these competitors could match Lululemon’s record for growth or its expansive network of nearly 60 stores.

However, serious competition could come from large companies such as Nike, Polo Ralph Lauren, Hanesbrands or VF Corp. Nike was the global leader in athletic shoes and apparel, with a market capitalization of $51 billion and 675 company-owned stores.6 It designed, developed and marketed footwear, apparel, equipment and accessory products and used proprietary fabrics such as Dri-FIT, that were designed to be cool, breathable and moisture-wicking. Nike designed women’s athletic apparel for a range of sports and had just launched a line of yoga-specific items. Nike promoted its products by sponsoring sporting events and focusing on key athletes, as well as using extensive advertising; for example, in 2006, the company spent $678 million on advertising in the U.S. market. Its promotional efforts included sponsoring events and key athletes.

Polo Ralph Lauren was a designer and distributor of lifestyle branded apparel. It designed and sold products to retailers through about 1,950 upscale department stores and through its own network of 282 specialty stores. The company enjoyed strong brand equity for its higher-end apparel and boasted nearly a million customers on its e-commerce website, https://www.sodocs.net/doc/4317851960.html,. Hanesbrands was a clothing company that was spun off by the Sara Lee Corporation in September 2006. With $431 million in annual sales, its flagship Hanes brand produced, among other things, active wear such as performance T-shirts and shorts, and casual wear such as T-shirts, fleece and sports shirts. Its second largest brand, Champion, was well-known as an urban fashion brand. The brand had a history of innovation, inventing the sports bra and reversible t-shirts. VF Corp. had more than $6 billion in revenues in 2006 and was the world’s largest apparel company. It had a stable of brands targeted at younger consumers including North Face, Vans, JanSport, Wrangler, Lee, Nautica and other brands.

While it seemed as if many clothing retailers were adding similar form-fitting, Lycra-based clothing, McDonald felt that Lululemon continued to enjoy the top spot in terms of brand image. He did not feel that increased competition was a major threat since Lululemon continued to be innovative by launching new products and updating its lineup frequently.

Financial Performance

Exhibits 2 and 3 show Lululemon’s recent historical financial statements. The company had financed its expansion largely through new equity investments and internal funds. Its capital needs remained low as a result of renting (rather than owning) stores and carefully managing inventory levels. Customers made their purchases with guaranteed funds (i.e., cash or debit cards or credit cards), and suppliers were paid within 30 to 45 days. At the end of fiscal 2007, Lululemon had little debt outstanding other than capitalized leases. The interest expense reported on the income statement indicated the company has used debt financing during the year; however, no debt was outstanding at the end of the fiscal year. REALIZING VALUE AND SECURING CASH FOR FUTURE GROWTH

Key Shareholders

In December 2005, Wilson sold 48 per cent of Lululemon to Advent International (Advent) and Highland Capital Partners (HCP) for a total of $93 million. He took a step back from active management, appointing former Reebok chief executive officer (CEO) and Advent operating partner Robert Meers as CEO of Lululemon. At Reebok, over a period of 15 years, Meers had grown sales from $13 million to $3.5 billion. Wilson now owned 49.8 per cent of the firm, with another 2.5 per cent owned by Lululemon employees and directors.

6 Yahoo Finance, accessed June 6, 2010.

Federal Securities’ Forecast

In media articles, Lululemon management had indicated that it would open 25 more stores in 2007 and another 30 to 35 stores in 2008. This increase in the store network would drive sales as well as capital expenditures. McDonald estimated that as the company added stores, it would become more efficient with its capital budget for each new store: store designs could be repeated, Lululemon’s brand could drive better lease terms, and leasehold improvements could be purchased in bulk. In spite of the fact that Lululemon stated it was expecting high sales growth in its current stores, the company did not provide any details of its growth plans beyond the next two years. However, McDonald and his team began building a financial forecast based on their own estimates and on conversations with industry observers and research analysts (see Exhibit 4).

From fiscal year 2010 to fiscal year 2012, an annual growth of 25 per cent would translate into an addition of between 35 and 47 stores per year. As each store established itself within the community, its revenues would continue to rise as the customer base grew and the merchandise mix was optimized to match local needs. Hence, the rapidly expanding company would have, for the next few years, a portfolio consisting of new stores and maturing stores. New-store sales were generally lower than sales from mature stores (i.e., stores that had been established for three years or longer). For forecasting purposes, the average sales per store within the company’s entire portfolio of new and mature stores were estimated to be about $3 million per year.

Lululemon’s cost of goods sold could be lowered to about 45 per cent, as efficiencies were reaped in manufacturing and in the negotiation of leases. By 2009, cost savings from higher volumes would be partly offset by additional costs such as insurance and storage. The Federal team estimated that Lululemon could reduce its selling and administration expenses down to about 30 per cent a year by 2010, as its sales volumes grew faster than its supporting sales and administrative infrastructure.

Capital expenditures were expected to grow in tandem with Lululemon’s store network. However, new store costs were expected to benefit from increased purchasing power for industrial supplies, driving down the costs involved in leasehold improvements per store. Federal estimated that capital expenditures for new stores, current stores and corporate improvements would average $40 million a year for 2009 and beyond. Lululemon’s tax rate had been very high in the last two years due to unusual tax items and Federal expected the company’s tax rate would approach normal levels of 30 per cent in the future.

Risks

In spite of the optimistic forecast, there were a variety of risks to consider. Lululemon intended to expand primarily in the highly competitive U.S. market. The consumer had many choices for active wear or sportswear, and competitors had been keeping an eye on Lululemon for the past few years. Lululemon expected to gain market share as it opened up new stores, but there were risks that revenue growth could slow if competitors managed to gain traction with their own active wear brands. In addition, while yoga was growing in popularity, another sport or activity could emerge to displace it, potentially drawing away consumers. Federal estimated that, in a pessimistic scenario, Lululemon’s growth rate could slow to 20 per cent per year, with a corresponding decrease in its store footprint growth rate.

The cost of leases was rising along with the price of real estate. In addition, Lululemon had to rapidly hire new employees and implement new systems to manage the increased flow of goods. The company would likely incur much higher store-operating expenses as a result, which could more than offset gains in

expense management. In a pessimistic scenario, the Federal team felt that selling and administration expenses could rise back to 35 per cent per year.

There were macroeconomic risks as well. At the start of 2007, the U.S. economy was slowing because of a downturn in the housing market. U.S. gross domestic product (GDP) growth was 3.2 per cent in 2005 and 3.3 per cent in 2006 but was forecast to be 2.3 per cent for 2007 and 2.6 per cent for 2008. The unemployment rate was 4.6 per cent in 2006, lower than the historical average of about 5.7 per cent.7 According to the Economist Intelligence Unit’s report in January 2007:

We expect growth in private consumption to be 2.7 per cent in 2007, compared with 3.5

per cent in 2004-06. The wealth effect from rising house prices is no longer boosting

consumer spending, and the decline in the household savings rate is already starting to

reverse — although it remains negative at the moment. In addition, housing equity

withdrawal, a key driver of consumer demand in 2004-05 and in early 2006 will decline

substantially. All these factors will depress private consumption in 2007. The same

pressures will linger into 2008, as consumers continue to rebuild their balance sheets.8

Canadian GDP growth was 2.9 per cent in 2005 and 2.7 in 2006, and it was forecast to slow to 2.2 per cent in 2007 as a result of a slowing U.S. economy.9

The Federal team felt there was significant potential for Lululemon to become a leading U.S. retailer. “If Lululemon were to offer about five million new shares in addition to a secondary offering by its major investors, it could raise roughly $30 million to $60 million to fund its expansion plans,” said McDonald to his team of associates and analysts. Exhibit 5 shows the current shareholder holdings for Lululemon. Market Conditions

At the start of 2007, the stock markets seemed to be performing strongly. In 2006, the S&P index had generated total annual return of 15.8 per cent, well above historical averages of about 10 per cent. Venture-backed IPOs performed very strongly in 2006, recording the second best year for IPOs in the past six years (see Exhibit 6):

“The current time seems to be a great window of opportunity to do an IPO,” stated McDonald. Exhibit 7 provides data on selected comparator companies to Lululemon, and selected market information can be found in Exhibit 8.

McDonald realized that one and a half years was a short period of time for a private equity firm to turn around and sell an investment, but he felt that Lululemon’s investors might want to realize some of the gains in value that Lululemon’s success had generated. “They might be entertaining other private investment opportunities, and realizing some gains from Lululemon might help them diversify their portfolio.”

McDonald thought Lululemon’s management and shareholders might want to delay an IPO until higher profits and a record of growth in the United States could produce a higher offering price for a stock issue. To fund growth without an IPO, Lululemon could add debt to its capital structure. Currently, Lululemon

7 The Economist Intelligence Unit, Country Report: The United States of America, January 2007, pp. 6-8.

8 Ibid.

9 The Economist Intelligence Unit, Country Report: Canada, January 2007, p. 4.

had no long-term debt, aside from capitalized leases, and its profit record could support a higher leverage ratio. If Lululemon were to raise $30 million to $60 million in the form of debt, with a term of 10 years, McDonald felt it would likely pay 6.25 per cent in interest per annum, which was the same rate as the yield on investment grade rated (Baa) corporate bonds in February 2007. The U.S. 10-year treasuries were currently yielding 4.56 per cent (see Exhibit 8). If $50 million were borrowed, the annual principal payments would amount to $5 million. The loan would be secured against Lululemon’s long-term assets. Other covenants for the debt would likely preclude additional debt, set a limit on capital expenditures above currently planned amounts, and restrict loans and dividends to shareholders.

McDonald realized that a $50 million issue of new stock or debt would cause Lululemon’s capital structure to temporarily deviate from the company’s long-term target leverage ratio that he felt would approximate the industry average of 20 per cent debt and 80 per cent equity.

THE TASK

McDonald addressed his team: “Let’s work to clarify the rationale for each of the options and value the company as a first step in proposing a price range for an IPO. Lululemon is a great story of growth and profitability and will no doubt be actively pursued by other investment banks.”

Exhibit 1

LULULEMON ATHLETICA

STORE NETWORK IN JANUARY 2007

Corporate Franchise

Stores Stores

Canada

British Columbia 92

Ontario 14–

Alberta 7–

Quebec 4–

Manitoba 1–

Saskatchewan – 1

Total Canada 353

United States

California 81

1

Colorado –

Illinois 2–

Massachusetts 1–

New York 1–

Oregon 1–

Virginia 1–

1

Washington –

Total United States 143

International

Japan 3–

1

Australia –

Total International 31

Total stores527

Source: Lululemon filings.

Exhibit 2

HISTORICAL INCOME STATEMENTS FOR YEARS ENDED JANUARY 31

(In thousands, except for per share amounts)

200720062005 Net sales148,88584,12940,748 Cost of goods sold*72,90341,17719,448 Gross profit

Gross profit as a percentage of sales51.0%51.1%52.3% Selling & administrative expenses47,92123,9509,717 Selling & administrative expenses as a percentage of sales32.2%28.5%23.8% Principal stockholder bonus012,80912,134 Settlement of lawsuit**7,22800 EBITDA20,8326,193(552) EBITDA as a percentage of sales14.0%7.4%-1.4% Depreciation & amortization4,6192,4661,123 EBIT 16,2133,727(1,674) EBIT as a percentage of sales10.9% 4.4%-4.1% Interest income(142)(55)(11) Interest expense475146

(94)(4)35 Income (loss) before income taxes16,3083,730(1,709) Provision for (recovery of) income taxes8,7532,336(298) Taxes as a % of EBT53.7%62.6%

Non-controlling interest(112)00 Net income (loss)7,6661,394(1,411) Net income as a percentage of sales 5.1% 1.7%-3.5%

Weighted average diluted number of shares of common stock

outstanding73,019

Common stock diluted earnings per share0.10

*Operating lease payments are included in cost of goods sold.

**The settlement of the lawsuit referred to estimated $7.2 million to be paid to a third-party website developer in February 2007 arising from the termination of a profit-sharing arrangement associated with Lululemon’s retail website.

Source: Lululemon filings.

Exhibit 3

HISTORICAL BALANCE SHEETS AS OF JANUARY 31

2007 2006

Assets

Current assets

Cash & cash equivalents 16,028,534 3,877,017

Accounts receivable 2,290,665 1,300,281

Inventories 26,628,113

21,077,881 Other current assets 3,545,431 962,145

Total current assets 48,492,743 27,217,324

Long-term assets

Property, plant & equipment, net 18,822,239 10,426,795

840,325 Goodwill 811,678

Other long-term assets 3,727,878 3,429,523

Total long-term assets 23,361,795 14,696,643

Total assets 71,854,538 41,913,967

Liabilities

Current liabilities

Credit facility 0 0

Trade accounts payable 4,932,960 5,877,048

Due to related parties 0 632,541

Settlement of lawsuit 7,228,310

Accrued liabilities * 7,292,323 2,987,708

Income tax payable 9,177,953 497,124

2,247,646

Other current liabilities 2,652,491

Total current liabilities 31,284,037 12,242,067

Long-term liabilities

Deferred income taxes 384,354 536,707

Other long-term liabilities ** 2,239,650 1,073,409

Total long-term liabilities 2,624,004 1,610,116

Total liabilities 33,908,041 13,852,183

Non-controlling interest 567,699 10,000

Shareholder’s equity

Common stock 1 1

Preferred stock 2,255 2,250

Additional paid-in capital 99,110,502 95,834,516

Accumulated deficit (60,677,395) (68,343,726)

Accumulated other income (loss) (1,056,565) (558,743

28,051,785 Total shareholders’ equity 37,378,799

Total liabilities and shareholders’ equity 71,854,539 41,913,968

Days sales outstanding (DSO) 5.6 5.6

Days inventory outstanding (DIO) 133.3 186.8

Days payables and accruals outstanding (DPO) 61.2 78.6

Debt to equity (%) *** 6.0% 3.8%

*Accrued liabilities consist of inventory in transit, wages payable, sales tax collected and miscellaneous expenses.

**Other long-term liabilities include capitalized lease liabilities.

***The debt to equity is calculated by dividing other long-term liabilities by total shareholders’ equity.

Source: Lululemon filings.

Exhibit 4

PROFIT AND CASH FLOW FORECAST BY FEDERAL

(In $000s)

Profit forecast20082009201020112012 Net sales260,548364,768455,960569,950712,437 Growth rate75.0%40.0%25.0%25.0%25.0% Cost of goods sold

Lease payments35,10049,72563,50979,38699,232 Other cost of goods sold89,963114,421141,673177,092221,364 Total cost of goods sold125,063164,146205,182256,477320,597 COGS as a percentage of sales48.0%45.0%45.0%45.0%45.0% Gross profit135,485200,622250,778313,472391,840 Gross profit as a percentage of sales52.0%55.0%55.0%55.0%55.0% Selling, General & administrative expenses95,100115,267136,788170,985213,731 S&A as a percentage of sales36.5%31.6%30.0%30.0%30.0% EBITDA40,38585,356113,990142,487178,109 EBITDA as a percentage of sales15.5%23.4%25.0%25.0%25.0% Depreciation & amortization*8,11714,56920,67325,31128,836 EBIT 32,26870,78693,317117,176149,273 EBIT as a percentage of sales12.4%19.4%20.5%20.6%21.0% Interest expense-----EBT32,26870,78693,317117,176149,273 Taxes9,68021,23627,99535,15344,782 Taxes as a percentage of EBT30.0%30.0%30.0%30.0%30.0% Net profit22,58849,55065,32282,023104,491 Net profit as a percentage of sales8.7%13.6%14.3%14.4%14.7%

Number of stores84119152190237 Store network growth rate42.4%41.7%27.7%25.0%25.0% Sales per store3,1023,0653,0003,0003,000

Cash flow forecast20082009201020112012 Net income22,58849,55065,32282,023104,491 Depreciation & amortization8,11714,56920,67325,31128,836 Expansion capital expeditures(30,000)(40,000)(40,000)(40,000)(40,000) Increase (decrease) in working capital** (6,365)(5,941)(5,198)(6,497)(8,122) Net cash flow(5,660)18,17940,79760,83785,206 *The depreciation & amortization is estimated at 20% of gross fixed assets, with a 50% inclusion rate in the first year for new additions

**Increases in working capital per year are based on turnover of receivables, inventory, and payables equal to 2007 levels

Source: Casewriters’ estimates.

Exhibit 5

FEDERAL’S ESTIMATES FOR LULULEMON’S CURRENT SHAREHOLDINGS

Shares owned pre-IPO

Number Percentage

Dennis (Chip) Wilson36,399,42549.8%

Advent International Corporation27,785,53638.1%

Highland Capital Partners6,994,9639.6%

Employees, directors, other1,839,027 2.5%

Total shares outstanding pre-IPO73,018,951100.0% Source: Lululemon filings

Exhibit 6

VENTURE-BACKED LIQUIDITY EVENTS BY YEAR, 2001-2006

Source: National Venture Capital Association.

Exhibit 7

DATA ON SELECTED COMPARATORS

Nike Polo Ralph

Lauren Hanesbrands VF Corp

Lululemon

Athletica

Year End31-May01-Apr01-Jul31-Dec31-Jan Sales, most recent fiscal year ($000s)14,954,900

$ 3,746,300

$ 4,472,832

$ 6,138,087

$ 148,885

$ Closing price, Dec 31st, 200698.81

$ 82.05

$ 25.58

$ 75.87

$

Price-earnings ratio (closing)

200636.3x28.1x7.6x16.0x

200534.9x30.7x NA12.1x

200448.2x22.9x NA12.5x

Sales CAGR (2003-2006)11.8%15.4%-0.9% 6.1%41.0% EBIT margins

200614.1%13.8%9.7%13.3%10.9% 200513.6%9.1%7.7%12.7% 4.4% 200412.0%10.3%9.2%12.8%-4.1% Net profit margins

20069.3%8.2%7.2%8.6% 5.1% 20058.8% 5.8% 4.7%7.8% 1.7% 20047.7% 6.5%9.7%7.8%-3.5% Return on equity

200622.1%15.0%10.0%16.3%20.5% 200521.5%11.4%8.4%18.0% 5.0% 200419.8%12.0%16.1%18.9%

Price-to-book value

20068.6x 4.8x0.8x 3.4x

20058.1x 3.6x NA 3.0x

200410.3x 2.8x NA 3.2x

Interest coverage

2006106.9x41.3x16.6x14.4x342.4x 2005388.5x27.3x10.2x11.7x73.0x 200459.0x27.4x11.4x10.2x-36.8x Book capitalization

Debt*13.8%7.9%24.2%27.9%6% Equity86.2%92.1%75.8%72.1%94% Total100.0%100.0%100.0%100.0%100% Total market value of equity ($000s)50,5918,6482,4648,511

Beta - weekly, over two years0.69 1.38NA0.96

Debt rating (S&P)A+NR NR A-

*Includes short-term debt, long-term debt, and other long-term liabilities.

Source: Mergent; S&P 500 PE ratios from Bloomberg, beta estimates from Bloomberg, Valueline and Google Finance.

Exhibit 8

SELECTED MARKET INFORMATION, FEBRUARY 28, 2007

U.S. Treasuries Rate

1 month 5.24%

3 month 5.16%

6 month 5.12%

1 year 4.96%

2 year 4.65%

3 year 4.55%

5 year 4.52%

7 year 4.53%

10 year 4.56%

20 year 4.78%

30 year 4.68%

S&P 500

Index

Value Price-to

Year Dec.31Earnings ratio

20031,11222.97

20041,21220.26

20051,24818.06

20061,41818.23

Source: DataStream.