today is May 20, 2022

With Peloton Interactive (PTON -4.93%) struggling to reignite revenue and subscriber growth after coming off its pandemic highs, it seems a misstep for Lululemon Athletica (LULU -2.15%) to start offering its own subscription-based workout classes.

Yet the athleisure-wear leader promised at its recent analyst day event to double revenue to $12.5 billion by 2026, and part of the plan is for Lululemon to go after a slice of what looks like an increasingly shrinking pie.

A person exercising in front of a Mirror connected fitness device.

Image source: Mirror.

Working up a sweat

Peloton Interactive is suffering from anemic growth. After years of triple-digit gains, investors are having to come to grips with mid-single digit growth. The number of connected fitness subscriptions continues to rise for the workout equipment maker, but the average number of classes members participate in is steadily declining.

After peaking at 26 monthly workouts per subscriber last year, it's now fallen to 15.5 workouts as gyms and fitness centers are fully reopened and people have access to more outdoor venues.

The pandemic is receding further in the rearview mirror for most people in the U.S. and the idea of being cooped up at home to work out has lost its luster. Peloton is trying to spark some interest in its products and services again by cutting prices on its equipment; launching new, lower-cost devices; and trying out new subscription plans that allow consumers to pay a monthly subscription fee for a new exercise bike and access to workout classes.

Lululemon has attempted to juice sales, too, offering some customers a free Mirror connected-fitness product if they sign up for for a one-year membership. But it's possible, maybe even likely, this effort will stall just as Peloton's has.

Look in the mirror

Lululemon bought Mirror two years ago for $453 million, and like Peloton enjoyed the contribution it provided during the lockdown phase of the pandemic. 

Mirror is a device -- well, it's a mirror -- that can stream live workout classes. Starting at just under $1,500, they're not cheap -- more than a Peloton Bike ($1,195), but less than one of its connected treadmills ($2,345).

Lululemon wants to lean into the connected fitness space and announced it will offer a two-tier membership, one free, the other costing $39 a month. The free subscription gives users access to monthly events, including speakers and fitness experiences powered by Mirror content, along with early access to products. The fee-based subscription, called Lululemon Studio, will provide access to 10,000 classes in 50 different fitness categories that currently exist through Mirror.

What will be unique about the program is that it does offer members the opportunity to participate in real-life classes at various partner studios. Presumably that will help get it over the hump of people who want to work out outside the home, so much so that it expects 80% of its customers to be a member of one of its membership programs within the next five years.

As loyal as Lululemon customers are, that seems an awfully high penetration rate. Last year it had been expecting Mirror revenue of around $250 million to $275 million, but ended up slashing it in half due to the same issues afflicting Peloton. 

A missing piece of the puzzle

Fortunately for Lululemon, Mirror isn't a major source of revenue at the moment, only accounting for 3% of revenue last year, so coming up short wouldn't be devastating.

Yet it was also seen as a natural fit for its upscale customer base at the time of its purchase, and that hasn't panned out quite as expected. With inflation running rampant, interest rates rising, and persistent supply chain issues causing shortages and delays, offering expensive connected fitness equipment and pricy workout classes may not be the driver for revenue growth it was once believed to be.