Lululemon Athletica Inc. Posts Strong Fourth-Quarter Earnings Despite Massive Connected-Fitness Platform Loss

Lululemon Athletica Inc., a leading athletic apparel company, reported its fourth-quarter financial results for 2022, which beat analysts’ expectations despite suffering a $442.7 million post-tax impairment charge due to the lackluster performance of its connected-fitness platform Mirror. The platform was acquired by Lululemon for $500 million in 2020 as part of the company’s ambitious five-year plan.

Impairment charge related to Mirror acquisition

According to Lululemon’s CFO, Meghan Frank, the impairment charge on the Mirror business was due to the overall challenging at-home fitness market and Mirror hardware sales coming in below expectations during the holiday season. The platform has almost been entirely written off after Lululemon’s significant write-down in Q4 of 2022.

Unsuccessful integration of Mirror acquisition

Lululemon unsuccessfully integrated the Mirror acquisition operationally, culturally, and from a sales perspective. The founder of Mirror, Brynn Putnam, stepped down as CEO in September 2021. Lululemon tried offering discounts on Mirror hardware and included it in a new all-access pass for $39 a month with workout content from other companies.

Pivoting away from hardware-centric model

However, Lululemon is now pivoting away from its “hardware-centric” business model and is considering not producing the Mirror hardware anymore. Instead, Lululemon’s CEO clarified that the company will add an app feature that will allow guests to access the same content without having to purchase hardware. This move is expected to drive adoption and revenue growth of content-based services while eliminating any hardware-related costs or challenges.

Case study on acquisition gone wrong

The failed acquisition of Mirror could become a case study on what not to do when acquiring another business. The $500 million investment in Mirror was a small portion of management’s five-year plan, but it resulted in a massive loss of shareholder capital.

Analysts’ reactions to Lululemon’s Q4 earnings

Despite the disappointing performance of the Mirror platform, Lululemon’s fourth-quarter earnings performed admirably. Several equity analysts raised their forecasts for Lululemon following the earnings report release. Citi analyst Paul Lejuez raised his recommendation to “buy” from “neutral” and raised his target to US$440 from US$350. Credit Suisse’s Michael Binetti, KeyBanc’s Noah Zatzkin and Wedbush’s Tom Nikic among other analysts also raised their price targets and forecast for Lululemon.

Strong Q4 earnings and 2023 outlook

For the fourth quarter of 2022, Lululemon reported revenue of $2.77 billion, up 30% YoY, beating the Street estimate of $2.70 billion. The company reported adjusted earnings per share of $4.40, beating the Street estimate of $4.26.

Revenue in North America and international sales were up 29% and 35%, respectively, YoY. Direct-to-consumer revenue was up 37% YoY and made up 52% of total revenue. Same-store sales were up 15% YoY.

Lululemon is guiding for first-quarter revenue to be in a range of $1.89 billion to $1.93 billion, with earnings per share in the range of $1.93 to $2.00. For the full fiscal year, Lululemon sees revenue coming in a range of $9.30 billion to $9.41 billion, which would be YoY growth of 15%, with full-year earnings per share in the range of $11.50 to $11.72.

Lululemon Studio Premium Tier expansion

Additionally, Lululemon announced that it will expand its Lululemon Studio premium tier with a new app launching in the summer of 2023, focusing on digital app-based services and the Mirror platform. The company remains on track for its Power of Three x2 growth plan, with the key pillars for growth being men’s apparel, direct-to-consumer, and international revenue.

Shares of Lululemon rose 8.92% in after-hours trading on Tuesday, indicating a positive response from investors following the strong fourth-quarter earnings report despite the connected-fitness platform’s massive loss.

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