Reflecting on Both Sides of Lululemon’s Mirror Deal


When Lululemon’s management gazes into the mirror it sees a solid athletic apparel company with lots of runway for expansion in Europe and Asia and no debt on a strong balance sheet.

But the image in the mirror peering back may be asking:

“What’d you do that for?”

Lululemon (NASDAQ:LULU) thought the best use of US$500 million of the $823 million cash pile it has lying under a yoga mat was to buy Mirror, a company that makes in-home fitness technology that projects holographic live streaming, on-demand and personal trainer workout routines. Like a Peloton minus the bike, head shaking and pumping music. 

On the surface, Lulu’s move seems like a logical adjacent extension of its core business into the fast-growing workout-from-home sector, especially with surveys showing people in no hurry to go back to the gym.

Since raising more than $70 million in private funding, including from hedge fund billionaire Steve Cohen through his Point72 Ventures, and launching in September of 2018, Mirror’s growth has been exponential with sales expected to hit $100 million this year. Bank of America Merrill Lynch believes that figure could hit $700 million by 2023.

The company’s upward trajectory has been abetted by the celebrity influencer boost many startups die for, in this case Alicia Keys, Reese Witherspoon, Ellen DeGeneres and Gwyneth Paltrow. 

Naturally, the stay-at-home orders accelerated the popularity of Mirror’s product, which is exemplified by company website traffic jumping by more than 500 per cent year-over-year in early April, and app downloads surging nearly 600 per cent quarter-to-date, according to app research firm SensorTower.

Lulu’s Mirror acquisition is considered a ‘scope’ deal in retail parlance as opposed to a ‘scale’ deal. One in which the company is moving into a new experiential area to complement its existing business rather than buying a similar competitor just for the sake of getting bigger.  

Dave Knox advises corporations on innovation and is the author of Predicting the Turn. He told Forbes:

“In the short term, it’s not about massive scale and reach but instead deepening the relationship with their consumers across their entire fitness journey.”

Knox thinks the timing of Lulu’s purchase is wise.

“The last few months have made this sort of innovation even more important as brands diversify their business models and revenue streams. Lululemon was already going down this path by offering fitness classes in some of their stores. Now they can have a similar relationship with consumers in their homes through Mirror.”

The Mirror deal could have been predicted because Lulu was an early investor in the company and Mirror founder, former ballet dancer Brynn Putnam, is a former Lululemon brand ambassador. Plus, the two companies had already partnered on meditation and other types of classes.

Key Mirror Facts:

  • The wall-mounted Mirror technology has an advantage over Peloton in that it’s relatively compact measuring 52 inches high, 22 inches wide and 1.4 inches in depth. 
  • Mirror retails for $1,495 and subscribers pay $39 per month to stream services. 
  • Mirror is planning to offer other services eventually including physical therapy, rehab and possibly tele-health. 

One can argue Mirror may be a good fit with Lulu’s affluent customer base in part because consumers could be given demonstrations in-store. 

But others are scratching their heads at Lululemon’s purchase arguing that buying a company in a low barrier to entry, fledgling and largely unproven market is not the best application of half a billion dollars.

On top of that, Lulu is paying about five times sales. Then again, it’s relative chump change compared to Lulu’s market value of more than $40 billion. 

Mirror also has competition from the likes of Tonal, Hydrow, Reflect and FightCamp, and big gym chains such as Equinox are moving into home fitness products and services. 

Hedgeye’s Retail Sector Head, Brian McGough, flat out does not like Lulu’s acquisition. 

Here’s a conversation between McGough and Hedgeye CEO Keith McCullough during a Hedgeye Morning Call:

McGough: There’s a fitness concept called Mirror. If you haven’t seen it, it is what it sounds like. It’s a big mirror and a hologram of a person. You watch what they do and work out. It’s been around for a few years. Lululemon came along and paid $500 million for it.

I don’t like the deal.

It definitely speaks to the whole workout-from-home craze. And it’s probably not bullish for Peloton (NASDAQ:PTON) when a company with deep pockets like Lululemon gets into your space. It validates it, but it’s more competition so that doesn’t help.

If I’m looking at a company like Lululemon, I don’t want to see them spending $500 million on a hard goods company where people wear Nike, Adidas and Under Armour while they’re working out at home. 

I want them investing in their own core. They still have so much store growth opportunity in Europe and Asia. It has great liquidity. It’s balance sheet is bulletproof.

There are a lot of incumbents in this space. So I’m not a fan of the deal.

McCullough: Think of all the hard goods deals Nike (NYSE:NKE) has done over the years, like Bauer. The return on invested capital is a disaster.

McGough: And they eventually have to get rid of them.

McCullough: It definitely changes the purity of the Lulu story. To have a peak multiple, you need to have those kinds of margins. It’s a great story when the company is accelerating revenues and the margins are so high. But this doesn’t expand margins. I’m guessing margins are peaking here?

McGough: It’s definitely peaked.//

Lululemon’s operating margin in the fiscal first quarter reported June 11 was 5 per cent, down 1.15 basis points from last year at the same time. But that number is skewed because Lulu shut all of its stores during much of the quarter due to the pandemic.

The comments from the Hedgeye guys are just two opinions but Lululemon’s return on its $500 million investment bears watching and will be better judged a year or two down the road in, yes, the rear view mirror.


Here’s a link to the Tuesday, June 30 subscription-based Hedgeye Morning Call, which the company is making available for free this week. The Lululemon/Mirror conversation starts at 7:21.

And read this in-depth Forbes profile about Brynn Putnam and her startup journey from idea to big payoff.