When Lululemon (LULU -0.09%) announced it was acquiring Mirror, the virtual workout start-up, some investors might have been reminded of Under Armour's (UAA 4.22%) (UA 3.54%) attempt to expand into the connected fitness space. Given Under Armour's recent struggles, it's difficult to remember that the company used to report massive revenue growth. The company seemed to be a perfect fit to integrate fitness apps, data collection, and fitness gear -- but its fortunes faded as management invested time and resources into a business it didn't seem to understand. If Lululemon's acquisition pulls resources away from the company's fabrics business, it could similarly spell trouble for the company's growth trajectory.

Why Mirror?

With gyms and many workout classes worldwide being put on pause or turning virtual, working out at home has never been more popular. Mirror offers a full-length mirror that doubles as a semi-transparent video screen. Combined with a $39 monthly subscription, Mirror allows users to access many different types of video workouts led by individual trainers overlaid on the reflective screen. Mirror's product doesn't look like a piece of workout equipment, yet it offers a similar experience to a high-end fitness class. Lululemon's CEO Calvin McDonald spelled out the argument for the acquisition: "We also believe that at-home virtual workouts will be an additive component of sweat regimens well into the future even as studios reopen."

Connected fitness

Image source: Getty Images.

Theoretically, the $500 million purchase of Mirror will allow Lululemon to leverage cross-sell opportunities and create a brand new revenue stream. But -- not to burst anyone's bubble -- the premise that in-home workouts will be the new norm may have one big hole in it.

The new norm or the now norm?

It seems like everyone is assuming right now is the "new normal." Wearing masks, staying apart, and working out at home are what we are required to do, but not what most people want. In fact, working out at home likely is only the "now normal," if multiple data sources are to be believed.

In a study of workout motivation, Len Kravitz, Ph.D, of the University of New Mexico found that, "Numerous studies show that social support from a significant other or meaningful friend is highly associated with exercise adherence." Further evidence gathered by Harvard Medical School suggests that joining an exercise class was one key a to avoiding exercise boredom, and that exercise -- especially with a friend or in a group -- can help treat anxiety. 

This helps to explain why Lululemon's brand has been successful: It brings people together around what it calls the sweat life. That focus, and  that sense of community, are lessons that rival Under Armour never quite understood. Worryingly, Lululemon might now be headed down a similar path.

The Under Armour lesson

In 2015, Under Armour was reporting revenue growth that routinely exceeded 20%. By March 2017, the company had acquired MapMyFitness, MyFitnessPal, and more, attempting to transform into a connected fitness platform. But by the end of 2017, Fool.com contributor Leo Sun suggested that Under Armour should exit the connected fitness business  completely.

Under Armour spent more than $1 billion on its tech dreams. The company attempted to market its own fitness band, heart rate monitor, and connected scale into an already crowded market. Instead of combining the capabilities of its different apps, it left their ecosystems fragmented. And during the connected fitness push, Under Armour's inventory levels ballooned as it tried to do too much, too fast.

This leads us to the company's most recent quarter , when connected fitness generated just over $32 million in revenue and a tiny profit. Under Armour's growth story seemed to derail as management got distracted by attempting to turn into a tech company. If Lululemon makes the same mistakes, its Mirror acquisition could repeat that dismal history.

Seeing clearly or a cloudy reflection?

The Mirror acquisition could also end badly because the company seems to be at a competitive disadvantage to Peloton Interactive (PTON 2.85%), which has a significant lead in the connected fitness market. Peloton also offers a digital-only option that Mirror is currently missing.

Mirror's virtual training classes are only available for owners of its nearly $1,500 device. Though the Peloton Bike and Tread are more expensive, the company offers a digital membership for $12.99 per month, with no other purchase required. The digital membership offers the company's classes on familiar platforms from Roku (ROKU -0.81%) to iOS or Android. This means subscribers can participate in a guided run with the Peloton app, take a yoga class on their television, or use their own bike or treadmill to work out while watching on their tablet or smartphone.

In Peloton's last quarter, digital subscribers increased 64% annually to 176,600 . The digital-only business is worth over $27 million per year in revenue to Peloton, whereas Mirror has no comparable option.

That absence isn't the only way Mirror falls short of its biggest rival. During the first six months of this year, Mirror averaged 550,000 monthly visitors to its site. By comparison, Peloton received an average of 3.3 million  visitors each month. What is almost as important is how these visitors arrived at each site.



















(Source: Similarweb. Table by author.)

The fact that Peloton gets double the direct web traffic suggests premium brand recognition. This advantage will be difficult for Mirror to overcome. And because Mirror must pay for promoted search results and social media ads, rather than having more prospective customers come to its site unprompted, the company spends more per customer on marketing costs than Peloton. 

The wrong kind of success?

If Mirror succeeds, Lululemon's management could get distracted from its core fabrics business by this investment. If it follows Under Armour down the wrong path, Lululemon's investors should keep a close eye on its inventories to make sure they don't start growing faster than sales over time. Investors should also look for integration of Mirror's offerings into the Lululemon main site. Running the business as a separate entity shouldn't mean keeping the Lululemon brand away from Mirror. Lastly, Lululemon needs to come up with a digital-only Mirror experience. This is a fast-growing subscription business for Peloton, and copying it might help grow Mirror's mainstream following.

Mirror's $100 million in projected revenue for this year  would represent just 2.5% of Lululemon's expected sales in the same period. This business hardly seems to support the significant increase in Lululemon's stock price over the last few months. In short, this acquisition could end badly for investors buying at current prices.