The Case for Lululemon's Acquisition of Mirror Grows Stronger

After companies have grown massively and seen major stock price gains all on their own, one strategy to keep the momentum going is to look at strategic acquisitions and partnerships that can act as a new leg of growth. Lululemon Athletica Inc. (NASDAQ: LULU) is a company that has seen phenomenal growth interrupted by the COVID-19 pandemic, and it is using a key acquisition to bolster its future.

The retailer of yoga and exercise-themed apparel and gear had revenues of $2.3 million in 2016 (January 2017 year-end), and that rose to nearly $4 billion for last year. While Refinitiv is calling for revenues to be flat in calendar year 2020, the expectation is that sales could rise to nearly $5 billion in the following year.

In an effort to capture that next leg of growth, Lululemon is acquiring Mirror for $500 million. This is the in-home exercise mirror that has an interactive video instructor to help get you through your workouts without having to go to the gym. The platform competes with the non-bike platform of Peloton Interactive Inc. (NASDAQ: PTON) and others.

While Lululemon could easily just stick to apparel, the reality is that it previously had classes and events, and this purchase of Mirror only further brings the brand deeper into people’s lives.

BofA Securities has a Buy rating and a $340 price objective on Lululemon, and the firm believes there is a significant upside in the Mirror acquisition. Its bullish view would be to add in $700 million in revenues and to have some 600,000 subscribers by 2023. That assumption is that the company’s growth rates are similar to what Peloton saw at its same growth stage.

BofA also believes that there is a very large potential total addressable market based on the size and rapid growth of the boutique fitness industry. With a high overlap in the customer base and in the distribution network from stores and e-commerce, this should help to accelerate Lululemon’s long-term growth.

One issue that also will factor in is that Mirror’s price point of $1,495 is about $750 cheaper than a Peloton bike. The flip side is that Peloton also now has its own app for non-spinning exercise that has helped to generate so much growth. The Mirror subscription service of $39 per month is also in-line with Peloton’s monthly fee. Peloton has a market cap that is now in excess of $16 billion, versus trailing 12-month sales of about $1.4 billion, and Refinitiv sees its sales going above $2.5 billion over the next two years.

Perhaps the larger question is why Peloton didn’t think about taking down this growing rival after it had such a strong stock performance as a stay-at-home winner.

That said, Lululemon was an investor in Mirror a year earlier, and it already had a content partnership with it. This should make the integration much easier, and it may have been a harder integration for another content provider.

Another positive report came from the team at Robert W. Baird. The firm reiterated its Outperform rating and raised its target to $340 from $330.

Also after the announcement, UBS maintained its Neutral rating, but the firm did handily lift its price target to $300 from $230.

While some investors would have wanted to see more analysts hiking their target prices for Lululemon, that already happened in mid-June after its earnings report was so strong.

Lululemon’s current market cap is ready to challenge the $40 billion mark. That is not cheap by any stretch, but the company has extreme brand loyalty and it is able to charge a significant premium over other similar apparel and accessories. Now the company has yet another leg of a defensive line in case it has to start shutting down more stores again due to the rising COVID-19 cases.

At $306.50 apiece, Lululemon shares have a 52-week range of $128.85 to $324.76. The Refinitiv consensus target price is $320.74, after the target price hikes from June, and shares are up close to 33% year to date despite the recession being so hard on many specialty brick-and-mortar retailers.