Lululemon Doesn’t Like What It Sees in the Mirror

Source: Kevork Djansezian / Getty Images News via Getty Images

Investors are all over a Bloomberg News report earlier this week that Lululemon Athletica (US:LULU) is exploring selling Mirror, the company’s fitness equipment maker.

The apparel brand acquired the business in 2020 for $500 million.

It’s been nothing but trouble for the company ever since.

When Lululemon reported excellent Q4 2022 results in late March, the only real blemish in the end-of-year report was the post-tax $443 million impairment charge it took for Mirror. The fitness equipment brand has never really gelled with the rest of its business.

As a result of Mirror’s lower-than-expected sales over the past two years, the company has rebranded the business Lululemon Studio with a focus on its app rather than the hardware.

In the almost three years since the acquisition, the athleisure company’s first and described in June 2020 as “a bet on the future of fitness and a way to further tie into the lives of its customers,” LULU stock has gained 28% in value while the S&P 500 index is up almost 38%.

Seeking Deeper Connections

“As previously announced, we are shifting the focus of Lululemon Studio from a hardware-centric offering to one that is also focused on digital app-based services going forward. This work is underway, and our strategy will enable us to create long-term value and build a larger community of guests with a deeper connection to Lululemon,” Bloomberg News reported on April 17.

Despite Mirror being Lululemon’s biggest misstep in years, the company’s Power of Three x2 growth plan remains on target, indicative of a business that’s more than capable of giving Nike (US:NKE) a run for its money.

“In the fourth quarter and full year 2022, we delivered strong results across the business driven by our innovative products, powerful guest experiences, and strategic market expansion,” stated Lululemon CEO Calvin McDonald in the Q4 2022 press release. “As we enter 2023, we look forward to another year of strong momentum across the globe and delivering on our Power of Three ×2 growth plan.”

Difficult Sales Proposition 

The company’s original Power of Three growth plans was set in motion in April 2019, with three goals to be met by 2023. They included doubling the size of its men’s business, its digital revenues, and quadrupling its international revenue.

It achieved its men’s and digital goals two years early in 2021 and its international expansion goals in 2022. As a result, it came out with the Power of Three x2 goals in April 2022.

They include doubling its men’s revenue between 2021 and 2026, doubling its digital revenue by 2026, and quadrupling its international revenue by 2026. In addition, it plans to double its overall revenue from $6.25 billion in 2021 to $12.5 billion in 2026.

Lululemon has enough for the next five years without Mirror continuing to distract the company. If the speculation is accurate, Hydrow, a Boston-based maker of rowing machines, is thought to be interested in acquiring Mirror, although the firm has denied any discussions are underway.

It’s difficult for soft lines businesses such as Lululemon to expand into hardlines businesses like Mirror. The margins are much lower, and it’s a far more difficult sales proposition because fitness equipment has a much higher retail selling price.

Cautionary Tale

A cautionary tale of what can go wrong happened in 2005 when Quiksilver Inc. acquired Rossignol Group for $325 million. The surf and ski wear apparel brand thought merging its love of the outdoors with the French ski gear business made great sense.

“We share the same passion for outdoor sports, and we have the same commitment to developing outstanding products,” Quiksilver President Bernard Mariette said in March 2005.

By August 2008, Quiksilver agreed to sell Rossignol for $147 million, less than half what it had paid three years earlier. By 2015, Quiksilver had entered Chapter 11 bankruptcy protection.

Thankfully, for LULU stock holders, the company is in a much better financial condition to absorb such a loss. If it can get $250 million for Mirror, it will be a significant victory for the company.

This article originally appeared on Fintel

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