lululemon athletica's (NASDAQ:LULU) $500 million acquisition of the MIRROR home interactive fitness brand made some waves in the athletic world when it was announced on June 29. While the deal might have seemed as if it came from left field, it didn't. It perfectly fits Lululemon's strategy to grow the brand through grassroots initiatives, community, and digital omni-channel experiences.

On a recent call to discuss the deal, CEO Calvin McDonald went into more detail about why Lululemon decided to buy MIRROR, which highlights opportunities for the company to add incremental sales through cross-selling between the brands. Here's what he had to say. 

A woman exercising with a Mirror device.

Image source: MIRROR.

More customers are working out at home

After Lululemon made an initial investment in MIRROR last year, McDonald said that his team "studied and learned the business from the inside and decided to pursue this opportunity." Before COVID-19, Lululemon had a high percentage of guests using digital at-home workouts, and statistics McDonald shared during the call spelled this out. 

Before COVID, 64% of Lululemon guests used a digital workout option at home. As the coronavirus spread during the recent quarter, that percentage jumped to 75%. Post-COVID, 86% of guests who used an at-home option during the outbreak said they would continue to use digital workouts at home at the same rate as before COVID, or at a higher rate.

What's more, approximately 50% of MIRROR users are Lululemon customers. A big reason for that is likely due to the content that has been created on MIRROR's platform by Lululemon ambassadors.

"Digital content is changing, and studio and trainer models for our ambassadors are changing with that," McDonald said. "With [MIRROR], we have more opportunities online with experiences that create a community field through the digital environment." 

Lululemon has grown over the years through its grassroots initiatives, which include sweat classes at stores, and marathons such as the SeaWheeze half marathon and other 10K races held in various cities in fiscal 2019. Adding an at-home option like MIRROR is supplementary to the events Lululemon already hosts for its guests.

"Our community initiatives in sweat is a huge advantage for our brand, that guests are interacting and thinking of Lululemon not just for a transaction in need, that they're interacting with the brand on an ongoing daily basis," McDonald said. 

By having a digital platform in the home, Lululemon can maintain a more frequent connection with guests throughout the year. This could lead to higher incremental sales of apparel and help MIRROR accelerate its growth from its current annual revenue run rate of over $100 million.

Selling MIRROR products through Lululemon stores

What we appreciated about MIRROR and the growth that they've achieved so far, which is very significant considering the opportunity and awareness behind the brand, is predominantly done through online.
-- CEO Calvin McDonald

MIRROR only has two physical locations. McDonald said this is "one of the reasons why their profitability model is going to tip profitable, I think, quicker than some other models out there." 

Lululemon is planning to sell these devices through its growing footprint of 489 stores, which should raise awareness for what MIRROR offers. Only one in-store display is needed to drive sales through stores, as McDonald explained. Customers can see it, learn about it, and place an order. As Lululemon typically does with new initiatives, management will take small steps before rolling this out further. 

The great thing about this is that Lululemon already has a robust online operation. Its digital sales spiked 70% year over year last quarter. This means the company already has the technology and logistics in place to sell MIRROR products to guests.

Lululemon takes a big step into digital content

McDonald also addressed the opportunity to drive higher sales of Lululemon apparel. "The point that we can sell and have the potential to sell even more apparel through the loyalty and building loyalty out with our guests and expand that is completely incremental to the investment thesis and what needs to happen," he said. 

But McDonald also made clear that the primary objective with the MIRROR acquisition was not to drive apparel sales. Investors should be more excited about the potential for MIRROR to add a growing recurring revenue stream to Lululemon's business. The company was already going for this with the loyalty program it's currently testing in select markets. MIRROR takes this opportunity to another level.

As McDonald said on the company's recent earnings call, "We also believe that at home virtual workouts will be an additive component of sweat regimens well into the future even as studios reopen and return to normal operations." 

It's clear that Lululemon has taken notice of the digital trends that have shaped consumer behavior in other industries and filtered into the fitness world. With MIRROR, it is staying on the cutting edge to deliver innovation to its guests and maintain its growth over the long term.