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How a Ballerina Outmaneuvered Lululemon's CEO
MIRROR sales plunge likely explains abrupt departure of founder who flipped the 2-year old startup for $500 million.
December 10, 2021
Lululemon’s (LULU) acquisition of an in-home fitness startup at the height of pandemic lockdowns now looks like an ill-timed panic buy. After promising to earn a profit in 2021 on MIRROR, a wall mounted device that streams virtual fitness classes and allows users to watch themselves work out, the company now talks only of a “path to profitability”.

Six months ago, on Lululemon’s June 3, 2021 earnings call, the company boasted of strong MIRROR sales and reiterated its forecast:

“MIRROR had a strong Mother's Day and remains on track to deliver $250 million to $275 million in revenue in 2021.”

The situation has deteriorated rapidly.

In its latest 10-Q, Lululemon acknowledged sales have declined and followed up on its earnings call by cutting MIRROR’s annual revenue guidance by half:

“...we are lowering our revenue guidance for MIRROR for the year to $125 million to $130 million.”

The dramatic decline explains the abrupt departure of MIRROR founder Brynn Putnam in September. Lululemon ditched Putnam 14 months after acquiring MIRROR for what is now a multiple of approximately 4x sales rather than 2x. Lululemon is now paying Putnam handsomely to go away. The company booked $17.9 million in accelerated compensation expense related to the MIRROR acquisition this quarter that was supposed to vest over three years.

Though Lululemon acknowledged earlier this year MIRROR has low brand awareness, the company cut advertising support for the product in the current quarter. We suspect this is what prevented Lululemon from raising its estimate that MIRROR will dilute earnings 3-5% in 2021. This is deceptive though as Lululemon conveniently excludes MIRROR’s acquisition and integration-related costs from its EPS calculation.

Lululemon recently cut the price of MIRROR by $500, or approximately 33%. Over the last year, interest in MIRROR— as measured by Google search trends— has been cut by half and appears to have worsened in the first ten days of December.

Lululemon’s stock barely budged following the MIRROR guidance cut. This is likely because MIRROR’s sales account for just 3% of Lululemon’s estimated 2021 revenue. But cutting advertising ahead of the all-important holiday quarter— when MIRROR generates much of its revenue— means hitting the new guidance is no sure bet.

Either way, Lululemon’s board of directors may be less forgiving than investors when it comes to CEO McDonald’s future acquisition leash. Paying what is now 4x sales for MIRROR— which may contain defects and injure users— suggests, at least in the near term, the CEO was outmaneuvered by a former ballerina with a degree in Russian literature.
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