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The Ratings Game: Lululemon sees big potential in Mirror, but investments drive guidance lower

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Lululemon Athletica Inc.
LULU,
-2.08%

is making plans to invest in its Mirror home fitness platform acquisition which analysts blame for 2021 guidance that was below Street consensus.

Lululemon reported fourth-quarter earnings and sales on Wednesday that beat expectations, and guided for  full fiscal 2021 net revenue in the range of $5.550 billion to $5.650 billion, earnings per share in the range of $6.10 to $6.25 and adjusted EPS in the range of $6.30 to $6.45.

The FactSet consensus is for sales of $5.592 billion and EPS of $6.49.

Lululemon shares traded down 2.8% on Wednesday though the stock has rallied 62.6% over the past year, outpacing the S&P 500 index
SPX,
+0.81%
,
which is up 54.5% over the last 12 months.

See: Lululemon’s direct sales nearly double in Q4

Lululemon announced the $500 million Mirror acquisition in June 2020, forecasting that the platform could generate $700 million in revenue and reach 600,000 subscribers by 2023.

Mirror generated $170 million in revenue in 2020, including the period prior to the acquisition.

“Guests were seeking more convenient at-home options before COVID-19, and they will continue to seek these options post the pandemic,” said Calvin McDonald, Lululemon chief executive, on the earnings call, according to FactSet.

“And we plan to continue to invest further into this advantage by adding even more live classes across more workout options, while also investing in the overall guest experience in building this powerful community.”

The fitness mirror looks like a regular full-length mirror, but provides access to a fitness trainer via streaming. The exercise classes are often live, but some are pre-recorded. The two-way mirror/camera allows for checking out performance and lets the instructor see the trainee also.

Lululemon plans to add two more studios by the end of the year offering triple the number of live classes. The company also plans to add seven instructors to the current 15.

Also: Nike highlights Jordan brand with women’s business up nearly triple digits in fiscal Q3

Mirror recently added the Face Off feature that allows users to compete against each other, and Lululemon is planning additional innovations. Mirror is also expanding internationally, starting in Canada by the holiday season.

Mirror revenue is expected to be $250 million to $275 million in 2021.

Mirror is now expected to be 3%-to-5% EPS dilutive in 2021, which Wells Fargo compares with an original plan for it to be modestly accretive.

“[T]he situation with Mirror is a bit of a head-scratcher, as management seems very pleased with the early results, yet they had to guide down the bottom-line impact to FY21,” analysts led by Ike Boruchow wrote.

“We also think that Lululemon’s premium valuation makes it tough to swallow numbers moving lower due to a non-core piece of the business.”

Wells Fargo rates Lululemon stock equal weight with a $330 price target.

“The earnings guide below prevailing consensus (5% at the midpoint), is entirely reflective of dilution from Mirror,” wrote Stifel analysts led by Jim Duffy, who say they remain confident about “the lifetime value economic return justification.”

Stifel rates Lululemon stock buy with a $445 price target.

MKM Partners is still confident about the long-term picture for Lululemon, not just because of Mirror, but other launches in the company’s pipeline, including inventory management technology, a pilot of same-day delivery, and shoes coming spring 2022.

MKM rates Lululemon stock buy with a $388 price target, down from $446.

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