Lululemon joined the ranks of the world’s most valuable retail brands behind the backs of Americans willing to squander $ 120 on leggings. Now the yoga clothing provider is spilling out, with a $ 500 million cash deal for Mirror, a new fitness equipment company.
The clothing company has long been introducing different products, including men’s clothing, and in territories outside its heart of North America. But the switch to training hardware is one of the clearest signs that its managers are turning to lines of business to maintain Lululemon’s status as a Wall Street favorite.
Calvin McDonald, CEO of Lululemon, said a boom in fitness at home helped make Mirror, which sells interactive screens for $ 1,495 before tax and a monthly subscription, a “compelling” proposition. Still, the group’s first acquisition since its founding 22 years ago, to be completed in the coming days, has raised perennial questions about whether its extraordinary organic growth has finally peaked.
“Lulu shows no signs of slowing down, but acquisitions made outside of a retailer’s core skill set have rarely been perfect,” said Simeon Siegel, managing director and senior retail analyst at BMO Capital Markets. “There is nothing wrong with the story at the moment. The most terrifying [for investors] about Lulu is, is this as good as it gets?
The New York-listed company has repeatedly challenged skeptics. Lululemon’s apparel, favored by celebrities like Meghan Markle, epitomizes the enduring popularity of “athleisure.” In affluent neighborhoods in the US and Canada before the coronavirus closed, Lululemon became as ubiquitous in coffee shops as it is in yoga studios, helping the company more than double annual revenue in five years to $ 4 billion.
In stark contrast to the difficulties of other retailers, Lululemon’s shares have quintupled in the past three years, beating a 29 percent gain in the S&P 500. Its market capitalization has increased to nearly $ 40 billion, approximately 10 times more than Under Armor’s, despite Lululemon having lower annual sales than rival athleisure.
Despite its omnipresence on Main Street, the Lululemon brand has retained its prestige and the company has outperformed during the pandemic. Revenue fell 17 percent yoy in the three months through May 3, as closings forced the retailer to close stores, although McDonald said a 68 percent increase in online sales was evidence that the increase Homework was fueling demand for comfortable clothing.
Meanwhile, Lululemon’s products, made in countries like Vietnam, Cambodia, and Sri Lanka, are among the most profitable in American retail. The company rarely offers discounts on its range of hoodies, sweatpants and sports bras, and its 22% operating margins in the past financial year were more than double that of Nike, according to Bloomberg data.
The bears worry that Lululemon will inevitably need to sacrifice its margins that outperform the industry to pursue growth. The company has been building the brand abroad, more aggressively in China, where it has around 40 stores. Recently launched products include its Selfcare range of deodorant, shampoo and beauty. The company also plans to enter the footwear market.
Lululemon has had some success turning stores into destinations, a hard-to-reach goal in retail, such as its 20,000-square-foot “experimental” store in Chicago, which offers yoga studios. However, Neil Saunders, managing director and retail analyst at GlobalData Retail, said the coronavirus had forced the company to control its ambitions to use its brick and mortar spaces to create a broader community of Lululemon. Those plans “may still be relevant later, but essentially had to be put on ice.”
The acquisition of Mirror, which offers online classes in activities ranging from the bar to boxing, “allows them to carry out that vision of services, content and subscription, virtually,” Saunders added.
The deal is a rare purchase by a retailer in the pandemic, which has altered trends in consumer spending.
Mirror, in which Lululemon first invested a minimal sum last year, has skyrocketed during the lockdown as homebound consumers have been unable to visit the gym. Still, the increase in home exercise would have inflated the valuation of the private company with losses, backed by hedge fund manager Steve Cohen. Shares of Peloton, the listed exercise bike company, have more than doubled this year.
“It is interesting that they have chosen to do this at the height of the market,” said Susan Anderson, a US retail analyst at B Riley FBR in Virginia. “Clearly, they are confident that this form of exercise will continue.”
Lululemon said he expected Mirror, founded by a former professional ballet dancer four years ago, to make a “modest” profit next year, excluding acquisition-related expenses.
The yoga clothing specialist, who does not have a chief financial officer after PJ Guido left in May to join a chain of car dealers, did not provide details on how he planned to do so, although McDonald said the two companies would be complementary. He said the clothing chain would sell exercise equipment in its stores, for example.
Regardless of the success of Lululemon’s Mirror integration, Mr. Saunders noted that the company remained part of a “wellness economy that has been growing for a long time.”
“It is definitely not a short-term fad. If anything, it’s really speeding up right now and Lululemon is at the center of it all. ”
