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Lululemon's CEO Delivers Bad News for Peloton Stock

The yoga apparel company has lowered guidance for its connected fitness device, Mirror.

Lululemon Athletica (LULU) - Get Lululemon Athletica Inc Report only makes a tiny share of its revenue from Mirror, the connected fitness device it bought in June 2020 for $500 million. 

The company has big plans for the product but its CEO Calvin McDonald has a very disciplined approach to using his resources and he sees rough waters — at least in the short-term — for the connected fitness space.

"As you know, 2021 has been a challenging year for digital fitness. And as I mentioned on our last earnings call, we have seen increasing pressures on CAC [customer acquisition cost] that are impacting the entire industry," he said during the company's third quarter earnings call.

That trend of rising acquisition costs won't have a major impact on lululemon because Mirror represents about 3% of its total sales. But for companies like Peloton (PTO) - Get Peloton Interactive, Inc. Class A Report, which are fully in the connected fitness space, those seemingly casual comments are somewhat chilling.

How is Lululemon Handling Mirror?

McDonald has no specific mandate to grow Mirror. That gives him the flexibility to continue to develop the product and its offerings without having to overspend to drive sales.

"We will not chase growth at any cost. We simply don't need to, but we will invest to define our unique proposition and to bring Mirror to market through our owned marketing channels," he said.

The CEO pointed out that Mirror recently launched in Canada and that the company had expanded the product offering with "the introduction of our innovative connected weights." 

He said he remains bullish on the overall opportunity but doesn't see the need to grow the segment quickly no matter the cost.

"We can and will stand out in a crowded space and leverage all that's unique about Lululemon," he said.

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Because of market conditions, Lululemon lowered its guidance for Mirror to $125 to $130 million for 2021.

"Given the seasonality of their business, which skews heavily to quarter 4, the timing of this revision is appropriate given the line of sight we have on its performance.," he said. 

The Mirror subscriber base has grown by 40% in 2021.

Mirror Is About Loyalty, Peloton Sells Fitness Devices

Both Peloton and Lululemon have strong brands with loyal customers bases. 

The problem for Peloton is that interest in the idea of working out at home on connected devices has either waned or the company has pulled forward some amount of demand that has led to a sales slowdown.

"We see Mirror as an opportunity to engage with our guests in new ways that we will continue to evolve and refine over time," McDonald said. "We are still early in creating our vision of a loyalty community that captures the best of Lululemon. This is not a sprint for us and we will maintain a steady pace forward that realizes our vision."

Peloton does not have the same luxury as its device and subscription sales are its business. 

Mirror could be an important piece of Lululemon's business but it barely impacts the company if it remains a niche or fails entirely. That's a very different model than the one that Peloton uses.

Lululemon shares, as of Dec. 13, had gained about 15% over the past 12 months while Peloton stock has dropped by roughly 66% in the same time period.