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  • The Seville Reporters

In Focus: Lululemon v Peloton and At-Home Fitness

Updated: Jul 8, 2020

June 11, 2020, Lululemon's (LULU) stock price is down more than $15 per share. The number of shares traded on the day doubled the previous day's volume. The following day the selling continues and the stock price closes down $11.76 on the day, and the volume on the day doubled the volume of June 11.

The stock closes on June 12 at $296.36, well off the high ($308.38) and low ($289.55) of the day, a technical sign of indecision amongst Lululemon traders and investors.

The coronavirus crisis had taken a swing at Lululemon and the punch landed. Lululemon reported its quarterly earnings on June 11, and missed earnings per share estimates by $0.04 and revenue estimates by $44 million, revenue was down 16% from where it was a year before.

If the world was going to be in a state of lock-downs, social distancing, mask wearing, and limited occupancy for the foreseeable future, Lululemon was going to have to adjust and diversify its revenue stream.

Lululemon's first action came this week when they acquired the in-home fitness company Mirror for $500 million.

The acquisition brings Lululemon a subscription based revenue stream, which could help it be less dependent on retail sales.

Mirror, founded by Brynn Putnam in 2018 uses a mirror that users can stand up or hang in their homes to deliver professional level workouts. The Mirror service costs $39.00 a month and requires a one year contract.

The cost of the mirror is $1,500 and there are additional services available like personal training for $40 per session. At that price point the Mirror way of fitness won't fit into many budgets, but it fits in well with what Lululemon has already established. A pair of shorts to exercise in made by Lululemon can run you $88.00.

The Mirror acquisition brings Lululemon into the competitive world of in-home fitness and in direct competition with Peloton (PTON), another in-home fitness company, which went public in late 2019.

Since going public Peloton's stock has gained more than 120%. Much of the stock's momentum was created by the coronavirus pandemic and a heavily criticized and heavily memed advertisement.

While Lululemon and its shareholders were feeling the pain of COVID-19's impact on its business, Peloton and it's shareholders were experiencing the benefit of people having to shelter in place. Peloton reported $524 million in revenue for the quarter ending March 31, 2020, beating analyst's estimates by $33 million.

In addition to the blowout quarter, Peloton gave revenue guidance of $500M to $520M for it's fiscal Q4. The revenue guidance trumped analysts expectations of $381 million, and it also came at a time when many companies weren't providing revenue guidance due to the uncertainty surrounding the coronavirus crisis.

But with Lululemon's acquisition of Mirror, the road ahead may have become a little tougher to maneuver for Peloton. Mirror now has access to Lululemon's capital, infrastructure, and customer base to out market and promote Peloton and the other at-home fitness companies.

Mirror is considered a small player in comparison to Peloton, Forbes estimates Mirror will accomplish $100 million in revenue in 2020, that's less than 10% of Peloton's 2020 estimated sales.

The fitness equipment market isn't a particularly big market when compared to others. For instance the IDC estimates that spending on cognitive artificial intelligence systems will reach $77 billion by 2022. Barclays research suggests the plant based meat industry could reach $140 billion by 2029. According to Allied Market Research the market for fitness equipment was valued at $11.5 billion in 2019, and is expected to reach $15.2 billion by 2027.

In addition to the small market size, Mirror and Peloton have made themselves the Mercedes and BMW of the market, which instantly prices a large number of people out of a Peloton bike ($2,000) or the Mirror product offering.

Lululemon's entrance into the market will be interesting to watch over the next few years. Its size and influence will allow it and Mirror to operate in a way that startups like Peloton, Tempo Fitness, or Tonal cannot afford to.

Investment Thoughts

Fitness is a matter over mind thing, if your fitness really matters, you really don't mind how you achieve it. Whether it's with two dumbbells, a $15 jump rope, or a free online fitness module, if it's keeping you in shape, and that's the goal, then you'll work with what you have.

From the anti-social distancing protest I witnessed in Michigan, Texas, and other parts of the U.S., people's need to be out and about trumps their need to be safe. I'm of the opinion that anywhere in the U.S. where fitness centers are able to open, people will go, just to escape the house, A $20 monthly membership, in-person interactions, and a live DJ trumps a $1,500 piece of fitness equipment, with a $39 monthly membership fee, and the safety of our own homes.

Peloton reported a churn rate of 0.9%, and a 94% 12-month retention rate in Q1 2020, which are great numbers. At-home fitness companies are banking on the coronavirus changing social behavior, and hoping that people adjust to being more isolated and staying away from crowds, and I can't see that being the case long term, people have shown for better or worse, they want to be out and about.

I also come back to the price of both Mirror and Peloton's offerings. These are niche products for a niche market. Even that portion of the population that craves social validation by purchasing things they can barely afford like a Mercedes or Louis Vuitton bag won't splurge on a Mirror, because they can't bring it with them wherever they go, like you can with a car or an expensive bag.

I like Peloton's deal with Westin to outfit Westin Fitness Centers with Peloton bikes. I also like that Peloton has created an industrial version of their bike that they are marketing to gyms. Mirror would be wise to follow that business model as well.

If I had to invest long term in this space it would be with Lululemon, only because at-home fitness is the cherry on top of what they do and not the whole sundae. I'm still not convinced that Peloton, as it operates now works long term.

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