The Future of Fitness: lululemon Buys Mirror

Last week, lululemon acquired the home fitness startup Mirror for $500 million. Mirror sells you the equivalent of a beautiful, giant iPad that hangs on your wall for $1,495. Then, if you pay a $39 monthly subscription, you can use a mobile app to turn the Mirror into a fitness class. Both on-demand and live classes are available for everything from yoga to boxing.

You may be wondering why a company that makes yoga pants is buying a company that makes smart mirrors and fitness videos.

Instead of looking at it that way, consider a different frame. Both companies target the same customer: affluent millennials who like to workout and stare at themselves in a mirror.

Kidding aside, this acquisition makes a lot of sense for lululemon. It goes deeper than simply marketing to the same demographic too. A few reasons why lululemon scooped up Mirror:

Added a recurring revenue stream (something they didn’t have before)
Opportunity to cross-sell Mirror to their existing customers
Earn a spot in the connected home with a new hardware product

And despite these great reasons, there’s also some evidence to suggest that customers might not be all that excited for Mirror.

Was it a good acquisition for lululemon? Or will it flop like so many other cross-sector M&A deals?

Let’s figure it out.

Subscription Hardware

Hardware is not typically a great business. From a post I wrote on Sonos earlier this year:

Consumer durables is a tough business, and hardware is no exception. There are two issues.

First, in a hardware business model, the customer only pays once but extracts value over several years. For Sonos, a customer might buy a speaker for $399 and use it for 10 years without paying Sonos again. Contrast this with a company like Spotify — the customer receives value each month and also pays Spotify $10 each month.

Second, the value proposition doesn’t change much with each cycle upgrade. Cars are a great example of this — most of the value to the customer is having an independent transport that has plenty of storage, includes seating for the family, and is safe. Regardless of whether a car is built in 2010 or 2020, most of those things don’t improve so there’s less of a need to upgrade.

However, Mirror isn’t a typical hardware company: they designed their business with recurring revenue in mind. While Sonos, GoPro and Fitbit struggled (well, are struggling) to start a product line that earns recurring revenue, companies like Mirror were built for it from the start. For $39 per month, subscribers get access to live and on-demand workout classes.

Pure hardware companies like GoPro and Sonos trade around 1x revenue while Peloton (the closest subscription-first public comparison we have to Mirror) is trading at around 11x revenue. With that in mind, lululemon buying Mirror for $500 million — 11.1x their 2019 revenue and 5.0x their 2020 projected revenue — looks like a good deal.

If lululemon were buying a standalone hardware business, I’d be skeptical of their ability to turn it into a stream of subscription revenue. But Mirror immediately gives lululemon a monthly charge on consumers’ credit cards, something they didn’t have before.