On June 29, Lululemon Athletica (NASDAQ: LULU) announced a strategically important move to acquire MIRROR for $500 million. MIRROR makes digital workout displays that it sells through its website for $1,495. It operates in the same interactive fitness space as Peloton Interactive (NASDAQ: PTON), so there is plenty of competition. The deal will be funded with Lululemon's available liquidity sources, including over $800 million of cash. MIRROR will continue to operate as a stand-alone company.
The upstart fitness brand was founded by Brynn Putnam, a former Lululemon ambassador, and launched just two years ago. The two companies collaborated last year on content after Lululemon made an initial investment in MIRROR. Several Lululemon ambassadors have launched content on MIRROR recently, making the deal a natural progression of how the two brands were already working together.
Now that MIRROR will operate as part of Lululemon, management has big plans that could be very beneficial for both companies. Here is why Lululemon and MIRROR make a perfect, and powerful, combo in the world of fitness.
MIRROR fits Lululemon's omni-experience strategy
In a statement, Lululemon CEO Calvin McDonald said, "In 2019, we detailed our vision to be the experiential brand that ignites a community of people living the sweatlife through sweat, grow, and connect."
Under McDonald, Lululemon has been pushing deeper into experiences to build brand loyalty and drive higher engagement with customers. Lululemon has a five-year plan to blend physical and digital experiences, including sweat activities. Last year, Lululemon opened experiential stores in Chicago and Minneapolis with locker rooms and other features to deliver engaging experiences for guests.
"The acquisition of MIRROR is an exciting opportunity to build upon that vision, enhance our digital and interactive capabilities, and deepen our roots in the sweatlife," McDonald said. "We look forward to learning from and working with Brynn Putnam and the team at MIRROR to accelerate the growth of personalized in-home fitness."
The $500 million purchase price could look like a bargain in 10 years
If you've been following Peloton, you know how fast the market for interactive fitness is growing. MIRROR is no different. It currently has an annual revenue run rate of $100 million, and that's with a relative lack of brand awareness.
While management expects the deal to be modestly dilutive to Lululemon's full-year earnings per share (EPS), there are plenty of synergies between the brands that will enhance Lululemon's growth beyond the market of selling pricey digital workout mirrors.
Like Peloton, MIRROR already has high engagement with its product and a stream of recurring revenue through subscriptions. What Lululemon can bring to the table to help MIRROR scale into a larger business is more robust marketing channels to lower guest acquisition costs, distribution channels, and access to millions of loyal guests who shop at Lululemon every year.
MIRROR also provides Lululemon ambassadors an outlet to continue creating more content, which will be significantly enhanced now that the two companies share the same resources and talent pool.
Lululemon is also looking forward to product integration. There could be major cross-sell opportunities down the road for MIRROR products in Lululemon stores, not to mention special benefits to members of Lululemon's loyalty program, which it is currently testing in select cities.
Creating the ultimate lifestyle fitness brand
As MIRROR takes advantage of these new opportunities to grow, Lululemon expects the business to reach profitability. The market for interactive fitness is steadily growing. As a reference point, consider that Peloton already has a market value of $16 billion. McDonald mentioned during the call that the global fitness activity market is worth $500 billion.
MIRROR is a small but fast-growing upstart, with a long runway of growth ahead. It's based in the U.S. with opportunities to expand internationally. Lululemon has millions of loyal customers who will be willing to try out a MIRROR product, especially as Lululemon creates its own workout programs for the device.
If MIRROR can continue growing at its current pace with the help of Lululemon's marketing muscle, it will help build the ultimate lifestyle brand, while adding a growing stream of subscription revenue to Lululemon's business. This growth stock is more than just an apparel store now.
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John Ballard owns shares of Lululemon Athletica and Peloton Interactive. The Motley Fool owns shares of and recommends Lululemon Athletica and Peloton Interactive. The Motley Fool has a disclosure policy.
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