Interactive fitness has exploded over the last few years with Peloton Interactive doing a lot to popularize the concept. Last quarter, lululemon athletica (NASDAQ:LULU) got in the game with the $500 million acquisition of Mirror, a maker of premium digital workout displays, and it has big plans to begin growing the brand this holiday season. 

Lululemon plans slow initial rollout of Mirror in stores

While Mirror is small with only $150 million in revenue expected for 2020, Lululemon will begin selling the device in a few stores by the end of the year before aggressively investing in growth starting in 2021. Lululemon announced during its fiscal second-quarter earnings report that it is on track to begin offering Mirror products in 10 to 15 Lululemon stores in the U.S. just in time for holiday shopping. 

A woman looking at a computerized mirror displaying weather, news, and health information.

Image source: Getty Images.

The initial rollout of Mirror devices is an opportunity to test and learn as Lululemon likes to do with new initiatives. "As we continue to test and learn through membership, and integrate Mirror into the Lululemon family, we are gaining valuable insights on guest behavior that can help us further improve our offering and enhance the ability of our guests to fully experience the sweat life," CEO Calvin McDonald said during the recent conference call.

At the time of the acquisition in late June, management guided that Mirror was on pace to generate more than $100 million in revenue for 2020, but they revised that guidance to more than $150 million in September, which hints at strong demand for the product during the pandemic.

Starting in the fiscal fourth quarter and into 2021, Lululemon is planning to capitalize on Mirror's momentum with increased marketing spend. "We made the strategic decision to increase marketing spend for Mirror in the second half to take advantage of current trends toward spending from home and capitalize on the opportunity to drive business during the holiday season and into next year," said Meghan Frank, Senior Vice President of Financial Planning and Analysis. 

How Mirror complements Lululemon

Mirror enhances a key strength of Lululemon, which is its omni-channel retail strategy, as McDonald discussed on the call. "What we're learning now during the COVID-19 environment is that omni means much more to our guests than simply enabling purchase transactions across our channels," he said. 

McDonald further explained that they are starting to look at other areas of the business, such as sweat classes and other events, "through an omni lens." This provides a high-level perspective on where they see Lululemon going in the long term and why the Mirror deal made sense. 

Many Lululemon ambassadors have offered live streams on social media channels to help people stay active during COVID-19. Lululemon is now offering digital content as a component to the loyalty membership program currently being tested in select cities. The addition of Mirror brings a more robust platform for Lululemon to continue offering digital programs for guests.

Smooth integration under way

"The initial work we're doing with Mirror during the upcoming fall season will set the stage for next year, and we expect to be more aggressively leveraging the power of the Lululemon ecosystem to grow the Mirror business," McDonald said during the conference call. 

The bulk of the integration work is already done. Lululemon has in place the capabilities to accelerate the growth of the Mirror brand, including processing orders in store and logistics. McDonald also mentioned on the call that Lululemon will sell Mirror devices through lululemon.com too -- the company's existing e-commerce infrastructure will serve Mirror well. Longer term, Lululemon will be able to use its network of experiential stores to film live classes to stream to Mirror products. 

Still, Mirror will be modestly dilutive to Lululemon's earnings this year as management ramps up marketing and advertising spending to fuel sales during the holiday quarter, which sets up momentum for 2021. 

It seems that Mirror follows a similar operating model as Peloton, which is to invest aggressively in marketing to grow brand awareness early on with the idea that this spending can be scaled back to build profitability over the long term. 

However, Mirror may reach sustainable profitability earlier than competitors, because it only has a few stores. Virtually all of its sales are generated online, whereas Peloton operates 103 showrooms. Mirror has an important advantage in being able to leverage Lululemon's existing store base without investing capital to expand its own retail footprint.

A great match

The combination of Mirror and Lululemon should prove powerful in the growing interactive fitness market. While there is the potential for cross-selling opportunities with apparel, the Mirror deal is more of an opportunity to grow the audience for Lululemon's workout classes digitally and to cultivate a community of loyal shoppers, which Lululemon already has a strong record of doing.