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After competing head-to-head for the past few years, exercise-bike maker Peloton Interactive Inc. and yoga-wear and athleisure giant Lululemon Athletica on Wednesday said they would team up on connected fitness. The deal landed amid heavy competition in athletic gear and after the economy’s reopening upended an at-home fitness boom during the pandemic.
But while some analysts saw benefits for both companies as news of the deal settled, others said it was a “non-event,” particularly for Lululemon, and raised questions about the subscriber gains for Peloton.
Under the five-year partnership, which rolls out next month, Peloton
PTON,
will become the “exclusive digital fitness content provider” for Lululemon
LULU,
Lululemon will become Peloton’s “primary athletic-apparel partner.”
Some Peloton instructors will also promote Lululemon’s clothing as part of the arrangement. Lululemon will also stop selling its Lululemon Studio Mirror — a digitally-enhanced mirror, intended to compete with Peloton, that displayed workout videos and other fitness data — before the end of the year.
Shares of Peloton were up 5.7% on Thursday. Lululemon’s stock was largely unchanged.
For Lululemon, Jefferies analysts said, the deal was unlikely to have much of an impact. They added that they were worried about a slowdown in business as the company deals with heavy competition in athletic clothing.
“We view this announcement as a non-event, particularly given PTON customers likely already shop with the brand, resulting in an immaterial impact to traffic as well as the company’s overall customer (total addressable market), in our view,” Jefferies analysts said in a note on Thursday.
The partnership will take hold across North America, the U.K., Germany and Australia. Starting Oct. 11, co-branded clothing across Lululemon’s products will be available at Peloton stores and online in the United States, the U.K. and Canada, and in Peloton’s other markets by March. Beginning Nov. 1, Lululemon Studio All-Access Members will have access to Peloton classes for the same price, at $39 a month.
But others saw benefits for Lululemon, particularly after it bought Mirror in 2020 to compete with Peloton, after pandemic-related lockdowns shut down gyms and left more people working out at home.
“We view this positively for LULU,” Wedbush analyst Tom Nikic said in a note on Wednesday. “First off, it ends the saga of one of LULU’s few strategic missteps in recent year, the $500 million acquisition of Mirror in 2020 (at the height of the at-home fitness craze).”
He said the deal’s benefits to Lululemon’s bottom line were “modestly favorable.” Mirror, he said, accounted for only around 1% of Lululemon’s sales. But he said it took around 20 to 30 cents off of per-share profits.
Other analysts also saw positives for Peloton, which has struggled since its massive stock runup in 2020.
“We believe the partnership enables PTON to better leverage its core content creation capabilities & drive low-cost customer acquisition, while moving further away from its own non-core apparel,” JPMorgan analysts said.
UBS analyst Arpine Kocharyan said the deal would make it easier for Peloton to do business in apparel. And while she described the partnership as “complementary,” she downplayed the benefits from any potential subscriber gains, which are essential for the company’s growth.
“PTON says more exclusive content will be available to people who sign up for LULU’s free Essential membership program, which currently has 13 million members,” she said. “While this number looks impressive vs. PTON’s ~6.5m members, we estimate actual Mirror subscribers paying $39/month are less than ~250k currently. Given that LULU and PTON will now split the $39/month per member fee, we estimate actual revenue to PTON of less than $75M from Mirror subs.”
“While enhancing the digital app strategy,” she continued, “the question of successful conversion still remains: would co-branding and exposure to Peloton digital content drive meaningful conversion to connected fitness subs?”
