Lululemon's (LULU +1.41%) $500 million acquisition in June 2020 of at-home fitness company Mirror hasn't panned out as management had hoped. And investors are starting to worry whether this was a huge waste of money.
On the fiscal 2021 third-quarter conference call, the booming apparel business lowered Mirror's full-year revenue guidance to between $125 million and $130 million (from $250 million to $275 million before). Although this is a rounding error for Lululemon's overall business, which is expected to generate greater than $2.1 billion in sales in the current quarter, it nonetheless begs an important question.
Was the Mirror purchase a mistake?
Image source: Getty Images.
Getting out of shape
Lululemon's management team cited weaker-than-expected demand and higher customer acquisition costs as reasons to lower guidance for the Mirror segment. This echoes what Peloton (PTON +0.58%), regarded as the leader in the connected-fitness market, has been experiencing for the past few quarters. Not only is the once-booming exercise bike manufacturer seeing revenue dramatically slow down, but its sales and marketing expenses also surged 97% in the most recent fiscal quarter compared to the prior-year period.
Luckily for Lululemon, Mirror's financial results will only dilute earnings by 3% to 5% for the full fiscal year of 2021. Meghan Frank, Lululemon's CFO, shared optimism on the last earnings call: "So in terms of Mirror in 2022 ... the path to profitability is very much within our control." Management also expects Mirror to boost its subscriber base by 40% year over year. That's a positive sign.
As of Oct. 31, Mirror shop-in-shops were in place at 152 U.S. Lululemon stores and 48 locations in Canada. The goal is to find ways to cross-sell Mirror products, which start at $1,495, to Lululemon's more than 10 million guests. I'm sure there is a significant overlap between the addressable demographics.
"We want everybody sweating on a Mirror to be in Lululemon and we want everybody sweating with Lululemon to be engaging and using a Mirror," Lululemon CEO Calvin McDonald highlighted. So far, this looks like a pipe dream.
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Key Data Points
Focus on apparel
There is a bright side for Lululemon investors to think about -- Mirror is only expected to represent less than 3% of overall company revenue in fiscal 2021.
Lululemon's business has been performing incredibly well, thanks to its Power of Three strategy that emphasizes a focus on an omnichannel experience, product innovation, and geographic expansion. Getting into the footwear business is another sign of how the company is pushing forward with new growth initiatives.
Having a thriving apparel operation affords Lululemon's management team the ability to not have to invest aggressively in Mirror to try and force success. They can continue to figure out ways to integrate Mirror into the bigger business and take a more calculated approach. Generating $1.4 billion in operating cash flow over the trailing 12 months provides plenty of financial flexibility to plow into boosting Mirror.
Nonetheless, investors are probably scratching their heads at the $500 million price tag Lululemon paid for the at-home fitness company. This was in June 2020, at a time when so-call COVID stocks were the darlings on Wall Street, and competitor Peloton's market value was skyrocketing.
Time will tell whether Mirror works out as leadership had envisioned. For now, Lululemon shareholders will have a thriving apparel business to keep their portfolios in tip-top shape.
