It's becoming clear that Lululemon (LULU) burned roughly $500 million in shareholder capital via the ill-timed purchase of the connected-fitness platform Mirror.
Buried in Lululemon's late Tuesday earnings release — which was solid overall and drove shares higher as of Wednesday morning — was a $442.7 million post-tax impairment charge in the fourth quarter related to the Mirror business, which was meant to rival Peloton.
"The overall at-home fitness space remains challenged," Lululemon CFO Meghan Frank said on the earnings call in explaining the impairment. "Mirror hardware sales during the holiday season came in below expectations."
Frank added the business is a "very small portion" of management's five-year plan. After factoring in Lululemon's write-down in Q4 of 2022, the business has now almost been entirely written off.
CEO Calvin McDonald, who has helmed Lululemon for nearly five years (and joined Disney's board in 2021), signed off on the purchase of Mirror for $500 million in June 2020 at a point in the COVID-19 pandemic when valuations for at-home fitness equipment like Pelotons and Tonals were skyrocketing.
As the waning pandemic led to a cooling of the home fitness market, Lululemon unsuccessfully attempted to integrate the Mirror acquisition operationally, culturally, and from a sales perspective. Mirror Founder Brynn Putnam stepped down as CEO in September 2021.
The athleisure company, which also dealt with consumer backlash on the platform's lackluster user experience compared to slicker experiences such as Peloton and Tonal, tried offering discounts on the hardware. In mid-2022, Lululemon said Mirror would be included in a new all-access pass for $39 a month. For the package, dubbed Lululemon Studio, Mirror users would be rolled into a subscription that also includes workout content from Rumble, Y7, Pure Barre, and DogPound.
Now Lululemon says it's considering a future of no longer producing the Mirror hardware, pretty much negating the very reason behind spending $500 million on the company.
"On Mirror, I just want to clarify, we're not eliminating the hardware, but we are adding an app feature that will allow a guest to sign up and pay a lower monthly subscription fee and access the same content without having to purchase the hardware," McDonald said on the call, minutes after Frank noted earlier it was "pivoting away" from the "hardware centric" business model. "So just want to clarify that. And that we'll launch later this summer."
In any case, Lululemon buying Mirror could become a case study in everything you shouldn't do when acquiring another business.
"We did see an improvement in our performance with the launch of Lululemon Studio in October, but as we've shared, it just didn't meet our expectations," McDonald's added. "And although CAACs are improving, they are still not proving fast enough that we felt prudent to make this pivot to open up the TAM [total addressable market] and appeal to a broader audience within our collective."
Brian Sozzi is Yahoo Finance's Executive Editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Tips on the banking crisis? Email email@example.com
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