Dive Brief:

• Lululemon on Monday announced a definitive agreement to acquire at-home fitness company Mirror for $500 million. Mirror will operate as a standalone company within Lululemon, with Brynn Putnam staying on as its CEO, according to a company press release.

• The athletic retailer said it will pay for Mirror with "over $800 million in cash, its existing $400 million revolving credit facility, and a new one-year, $300 million revolving credit facility."

• Lululemon last year joined a $34 million investment round into the startup, which was founded in 2018. Lululemon's "Global Ambassadors" began contributing "sweat and meditation classes to the MIRROR platform" and that will continue in the effort to bring in new customers to both, Lululemon said Monday.

Dive Insight:

While Lululemon's previous investment into Mirror shows that it was already keen on the potential of at-home workouts, the COVID-19 pandemic has only stoked that by forcing consumers to lock down and gyms to close. Indeed, rival Nike temporarily dropped the subscription fee for its NTC Premium streaming workout service in the U.S. because of the pandemic, mimicking a similar move the retailer first tested out in China. For Nike, the move resulted in high engagement and sales on its commerce apps in China.

Mirror uses its own hardware and "responsive software" to offer weekly live classes, on-demand workouts and one-on-one personal training, per the press release. That fits neatly into the apparel retailer's brand play, especially since, as Wedbush analysts led by Jen Redding noted Tuesday, half of Mirror's customer base overlaps with Lululemon. 

"In 2019, we detailed our vision to be the experiential brand that ignites a community of people living the sweatlife through sweat, grow and connect," Lululemon CEO Calvin McDonald said in a statement. "The acquisition of MIRROR is an exciting opportunity to build upon that vision, enhance our digital and interactive capabilities, and deepen our roots in the sweatlife."

Analysts see it that way, too. MKM Partners Managing Director Roxanne Meyer in emailed comments called the acquisition "highly attractive and synergistic, and ... well vetted" in light of last year's investment.

Further, the tie-up enables Lululemon to capture "share of the exponentially growing at-home fitness subscription model, with growth only accelerated by the pandemic," Meyer said Tuesday. "We see [Lululemon] as well positioned to capitalize on this given its sizable global customer base (which we estimate is growing over 30% annually), its strong omni-channel model, and its solid liquidity position."

Wedbush called it a "smart move" and said the acquisition could deliver a revenue boost sooner than executives expect, noting that the company projects Mirror to deliver $100 million this year, diluting profits this year but becoming "modestly" profitable next year.

For Mirror, Lululemon's 500 or so stores provide a brick-and-mortar opportunity without the steep customer acquisition cost of establishing its own stores, Wedbush also said.

But Credit Suisse analyst Michael Binetti — noting that at-home fitness company Peloton has been EBIT negative on $1.4 billion in revenues in the last 12 months, Nike ditched its own hardware-based connected fitness effort and Under Armour's connected fitness business took more than six years to yield profits — said there isn't much evidence to support that kind of near-term profitability. Still, Lululemon "could be the one to make it work," he also said in emailed comments Tuesday.

"[W]e do see several synergistic opportunities," he said, noting that, as with Peloton, consumer investment into Mirror's hardware could make them stickier. "More importantly, MIRROR seems like a very high touch way to leverage [Lululemon]'s long history of relationships with key fitness influencers, and a portal to consistently pipe new seasonal fashion offerings into the homes of its highly loyal (and high purchase frequency) consumers in an authentic way."