Lululemon Absorbs $442.7M Mirror Charge and Keeps Charging On
Lululemon Athletica Inc. is staying limber — flexing around a $442.7 million after-tax charge against its 2020 Mirror acquisition to tout plenty of growth elsewhere, in its loyalty program and revenues.
The activewear brand has been going from strength to strength for years and in the fourth quarter logged big revenue numbers across its business. The three-year compounded annual growth rate clocked in at 23 percent for women’s, 26 percent for men’s, 44 percent in accessories, 10 percent in its stores and 46 percent online.
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Investors liked what they saw and sent shares of the company up 9.9 percent to $351.85.
Mirror, though, has proven to be a rare stumble, although one that is helping to feed Lululemon’s growing loyalty program.
Calvin McDonald, chief executive officer, acknowledged the misstep in a call with analysts on Tuesday and explained a little of the company’s rationale going into the deal, noting that Lululemon tested a paid city-based membership program with promising results.
That led to the $500 million Mirror acquisition, just when the pandemic had many people locked down and looking to work out at home.
“However, as you know, since our acquisition, the at-home fitness base has been challenging,” McDonald said. “While members love our content, hardware sales did not match our expectations.”
Even though the business has improved, he said the company would not maintain the current level of investment.
“As we continue to invest prudently in this business, we are evolving the model from being focused on hardware-only to offering content through a digital and app-based solution as well,” he said. “The new, more efficient app-based model will launch this summer at a lower monthly subscription rate.”
Mirror has morphed into Lululemon Studio, which McDonald said the company viewed the same way as it did any innovation.
“We test, we learn and we evolve as necessary,” he said. “Although the acquisition is not fully materialized as originally intended, we are in a much better position in our understanding of community and our new membership program as a result.”
The company’s research suggests that Lululemon Studio members made a 9 percent incremental increase in their spending on the brand’s product.
The CEO also revealed that the separate and free Essentials loyalty program, which offers access to content but not discounts, has more than 9 million members after just five months.
Neil Saunders, managing director of GlobalData, said Mirror was “once meant to be at the heart of the company’s push into content and community building” but “failed to resonate with the mass of consumers.”
“In our view this is because it is an expensive and relatively complex solution that too few are willing to invest in,” said Saunders. He described Lululemon Studio as a “lighter, less complex approach [that] is likely to find more favor, especially among loyalists — although it will still need to work hard to compete with, and differentiate from, the array of other fitness content that is readily available.”
Despite the setback, he noted that, “Lululemon has ended a very strong fiscal year with a flourish.”
The company’s adjusted fourth-quarter earnings per share rose to $4.40 from $3.37 — coming in 14 cents ahead of the $4.26 analysts anticipated. Still, net earnings fell to $119.8 million including the Mirror charge and compared with profits of $434.5 million a year earlier.
Revenues for the quarter ended Jan. 30 increased by 30.2 percent to $2.8 billion from $2.1 billion a year earlier, outpacing the 26.8 percent growth Wall Street expected.
McDonald said the company navigated a highly promotional holiday season well and that regular price sales returned to normal levels with spring merchandise.
“We do not drive our top-line growth through discounts or promotions, and we have no intentions to do so,” he said. “We run a full-price business with markdowns strategically used to clear seasonal and other select product and this will remain our approach in the future.”
He also noted that, while the adult active apparel industry saw its fourth-quarter revenues in the U.S. slip 5 percent from a year earlier, Lululemon gained 2.3 points of market share, according to The NPD Group.
“This is the highest quarterly market share gain we’ve achieved since we began tracking these numbers in 2020 and it caps a year in which we grew our market share every quarter,” he said.
For the year, the company’s revenues increased 30 percent to $8.1 billion with adjusted EPS of $10.07.
This year, Lululemon is looking to top that although with revenue growth slowing to a 15 percent increase, to a range of $9.3 billion to $9.4 billion, and EPS of $11.50 to $11.72.
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