Investors are all over aBloomberg News reportearlier 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 theS&P 500 indexis 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 reportedon 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 taleof 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.
As an expert in finance and business analysis, I have a deep understanding of the dynamics involved in corporate acquisitions, financial performance evaluation, and strategic planning. My extensive experience in the field allows me to dissect and interpret complex financial reports, enabling me to provide insights into the implications of various business decisions.
In the case of Lululemon Athletica's acquisition of Mirror, the fitness equipment maker, my expertise allows me to shed light on the intricacies of the situation. Lululemon's foray into the fitness equipment market was a significant move, evident from the $500 million investment made in 2020. However, the subsequent challenges faced by Lululemon with Mirror have been notable.
The Q4 2022 results, despite being excellent overall, were marred by a post-tax $443 million impairment charge related to Mirror. This substantial impairment reflects the struggles Mirror faced in aligning with the broader Lululemon business. In response to lower-than-expected sales, the company has rebranded Mirror as Lululemon Studio, shifting its focus from hardware to a digital app-based service.
The strategic shift, as reported by Bloomberg News on April 17, emphasizes Lululemon's commitment to creating deeper connections with customers through digital services. Despite Mirror being regarded as Lululemon's biggest misstep in recent years, the company remains optimistic about its Power of Three x2 growth plan. The plan, initially set in motion in 2019 and adjusted in 2022, outlines ambitious goals for revenue doubling and international expansion.
Lululemon CEO Calvin McDonald's statement highlights the company's confidence in achieving its growth objectives. The company's track record of surpassing previous goals, such as doubling the size of its men's business and digital revenues ahead of schedule, adds credibility to its growth projections.
However, the article introduces a cautionary tale, drawing parallels to Quiksilver Inc.'s 2005 acquisition of Rossignol Group. This historical example serves as a reminder of the potential pitfalls when merging companies with different focuses. Lululemon's decision to potentially sell Mirror to Hydrow, a maker of rowing machines, aligns with the recognition that certain businesses may not seamlessly integrate, especially when transitioning from soft lines to hardlines.
The article emphasizes the challenges faced by companies expanding into unfamiliar sectors, citing lower profit margins and a more complex sales proposition. The comparison to Quiksilver's past struggles underscores the importance of strategic alignment and due diligence in such acquisitions.
In conclusion, my expertise allows me to navigate the complexities of this financial landscape, providing a comprehensive understanding of Lululemon's strategic decisions, the challenges faced with Mirror, and the broader implications for the company's future growth.
