Gold Plunge- A Normal Correction or The End of the Glittery Shine for Now?

Summary

• lululemon athletica is acquiring wellness platform MIRROR for $500 million, in part to support its ambition to sustain and grow in the industry.
• Canadian retailer operates stores in most of the developed markets and is entering new categories like casual wear.
• lululemon reported first quarter revenue of $652 million and gross profit of $334.4 million.

lululemon athletica inc., a healthy lifestyle inspired athletic apparel company, has reached a deal to acquire exercise hardware start-up MIRROR.

In the last decade, apparel retailers faced distress, leading to closure of many stores, bankruptcies, liquidations and revival. But lululemon has been growing and delivering topline and bottomline growth. The company has successfully operated through its omnichannel retail footprint, spanning across geographies including China, UK, Japan, Australia, France, Singapore and Ireland.

Based in Vancouver, Canada, lululemon had 489 stores, globally, at the end of first quarter of 2020. As a result of COVID 19, stores were closed in most of its locations; however, 295 stores restarted their operations by 10 June 2020.

Over the past five years, the company has almost doubled its revenues and delivered substantial net income growth. It has become one of the most valuable retail brands, as its products and margins have the limelight.

MIRROR to be acquired for $500 million

MIRROR sells interactive workout equipment that allows people to workout at home and features live and on-demand fitness classes. A definitive agreement was entered between the start-up and lululemon to acquire the business for a consideration of $500 million.

lululemon believes that the acquisition enables to accelerate its growth plan, focused on advancing the business via delivering omni-guest experiences. Management stated that they are sticking with the implementation of their Power of Three growth plan. MIRROR would add to the digital capabilities of the company and provide new solutions to lululemon’s new and existing guests.

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lululemon Chief Executive Officer, Calvin McDonald, stated that the acquisition builds on the company’s vision of becoming an experimental brand that ignites the section of health-conscious and fitness community, allowing them to grow and connect. He added that MIRROR provides the ability to accelerate the company’s vision.

The acquisition of interactive equipment maker comes after a successful partnership, which started in mid-2019. Earlier, lululemon invested in MIRROR and started a content partnership, bringing additional artists to the platform from its Global Ambassadors.

The transaction would expand the content partnership between the businesses and allow to increase customer penetration. Brynn Putnam, the founder of MIRROR, will continue to head MIRROR as a standalone business.

Management was also vocal about the rich cash levels held by the business since most of the retailers are facing stress amid the COVID 19 pandemic. lululemon had over $800 million cash and additional debt facilities of $700 million.

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lululemon intends to sustain the growth and momentum of the business

lululemon shares are trading at life-time high levels, indicating that investors are buying the growth story of the business. The company has been entering new categories, as well as new countries, as intentions for a global brand are genuine.

MIRROR is the first acquisition of the company since it was established 22 years ago. With a track record of solid revenue and income growth, lululemon is a Wall Street darling, backed by solid margins.

Successfully entering new markets and sustaining margins will likely give hard time to the management, but it will show quality of the business if they were to sustain the profitability.

The company continues to enter new categories, and the omnichannel platform will likely sustain topline over the near term. With a bleak economic picture, pandemic and growing geopolitical tensions, there remain some risks to the growth story.

Health-conscious wave is perhaps accelerating

Health & wellness industry has been on a strong momentum over the past years. Globally, the wellness market was $4.5 trillion in 2018, according to Global Wellness Institute. The pandemic has certainly altered the mindset of people, as individuals already diagnosed with health problems have suffered relatively more.

Activities that require high contact were completely neglected by society, but consumers are returning as economies re-open. In the meantime, lockdowns had accelerated the take-up of digital services, including home-workout classes.

People are perhaps revisiting their lifestyle, and there appears to be a greater need for a healthy lifestyle in society. It may not be only limited to apparel and training, but also to products and services like nutrition, personal care, and wellness tourism.

First quarter revenue down 17%

In the first quarter of 2020, lululemon’s revenue was $652 million, down 17% y/y while gross profit declined by 21% to $334.4 million. The company repurchased around 400k shares, and its diluted EPS stood at $0.22 in Q1 2020 against $0.74 in the same period last year. The company also closed some stores and reduced operating hours.

Given the uncertain trading conditions, lululemon did not provide any forward guidance.

(All currencies in USD unless or otherwise stated)