Not content with sitting in Nike’s shadow any longer, Lululemon’s clever, albeit unusual acquisition of Mirror could take its stock to a new level
I know the number one rule is that I’m not supposed to talk about it, but the first thing I thought of upon hearing about tech start-up Mirror was a quote from David Fincher’s all-time classic, ‘Fight Club’. When berating the narrator for his capitalist-driven lifestyle, Brad Pitt’s Tyler Durden comments: “We are consumers. We’re the by-products of a lifestyle obsession.”
I lay awake all night pondering this, and wondering who in their right mind would willingly fork out $1,495 for a wall-mounted Big Brother-esque mirror device that offers on-demand workouts and one-on-one personal training sessions? I eventually arrived at the conclusion that lots of people would pay for this — which is exactly why Lululemon (NASDAQ: LULU) splashed out $500 million to buy them.
Why is Lululemon investing in at-home workout equipment?
I’ll be perfectly honest, I have no interest in Mirror, nor do I believe that it is something I would ever buy for myself. However, I can understand its appeal to many consumers, especially in the midst of a pandemic. With several newly reopened Planet Fitness (NYSE: PLNT) locations forced to close once more this week due to spiking coronavirus cases, at-home exercise equipment looks set to remain part of our lives.
Although Lululemon has traditionally been a thorn in the side of its main rival Nike (NYSE: NKE) and one-time Wall Street darling Under Armour (NYSE: UAA), it has now entered a whole new game: subscription services and monthly recurring revenue.
By acquiring Mirror, Lululemon is now putting itself in direct competition with the likes of Peloton (NASDAQ: PTON), a stock that has risen almost 130% since its IPO last September. Peloton offers a pricey indoor bike (or treadmill) and a subscription service that allows users to take part in cycling classes and workouts and has proven very popular since the beginning of lockdowns.
Mirror offers something similar by digitizing time and space. Though cynics such as myself do not understand the value of such a device, try telling that to a parent of three with little free time and a demanding job who can now attend classes in their own home without fear of anxiety or judgment. Right there is where its true value lies.
What’s the landscape like?
In investing we always say that there is no right time to get started, and the same can be said for adapting to the current global situation. Just yesterday, the World Health Organization (WHO) warned world leaders that the coronavirus pandemic is speeding up as countries ease lockdown rules, and that ‘the worst is yet to come’.
We are already seeing evidence of this ominous premonition everywhere: coronavirus cases are hitting record highs, giants like Apple (NASDAQ: AAPL) are closing their stores again, and companies such as Twitter (NYSE: TWTR) and Shopify (NYSE: SHOP) are making at-home employment a permanent policy. While we tend to focus on the likes of Zoom (NASDAQ: ZM), Slack (NYSE: WORK), and Microsoft Teams (NASDAQ: MSFT) — which help people work — we can’t forget about the more personal stocks such as Netflix (NASDAQ: NFLX), Activision Blizzard (NASDAQ: ATVI), and now Lululemon.
With more and more people opting to work and stay at home, the importance of products such as Mirror is going to be more prominent than ever, and it can afford to make such a move right now. Lululemon fared well in Q1 despite a 17% sales drop, as it still managed to scrounge together a profit of $0.22 per share on revenue of $651.96 million, and its stock is up 26% YTD versus the S&P 500’s (NYSEARCA: VOO) 6% decline.
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So, was buying Mirror a good idea for Lululemon?
I may not get it, I may not even like it, but $500 million could be a smart investment in a growing industry in the midst of unprecedented mass migration from the public sphere to the living room. Not only is it a leader in athleisure sales, but now it can firmly pit itself against competitors and force consumers to break a sweat as well as pay monthly recurring subscriptions.
As someone who hates to work out but understands its necessity, I tend to form a sort of Stockholm Syndrome-like love for my favored workout products, which could be exactly the kind of emotion that Lululemon can expect to exploit consumers with.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.