Analysts generally view Peloton and Lululemon’s new partnership positively but question how much growth it will drive for the companies.

As reported, under the five-year partnership, Peloton becomes the exclusive digital content provider for Lululemon’s Studio at-home workout offering while Lululemon takes over as the exclusive athletic apparel partner to Peloton. Beginning November 1, Peloton will give access to its library of more than 1,000 classes across modalities to Lululemon’s All-Access members, including Mirror owners, with Peloton the sole content provider offering new classes weekly. Peloton will also make exclusive content available to the over 13 million members of Lululemon’s free Essential membership program. 

Effective November 1, Lululemon will discontinue its app-only membership tier while offering its app users the option to convert to Peloton’s App One Membership, and Lululemon will also stop selling its Mirror device at the end of 2023, ditching a plan to sell the business.

Co-branded apparel across multiple Lululemon product lines will be available at Peloton’s retail stores in the U.S., UK and Canada on October 11, and globally by March 2024. Previously, Peloton manufactured its apparel in-house. Also, several Peloton instructors will become Lululemon brand ambassadors as part of the partnership.

Peloton saw a better investor reaction as its stock on Thursday increased 25 cents, or 5.4 percent, to $4.90. Shares of Lululemon were about flat, down 14 cents to $379.

Tom Nikic, who covers Lululemon for Wedbush Securities, viewed the deal as positive, writing, “First off, it ends the saga of one of LULU’s few strategic missteps in recent years, the $500 million acquisition of Mirror in 2020 (at the height of the at-home fitness craze).” 

Nikic believes Mirror accounted for less than 1 percent of LULU’s revenues but was dilutive to EPS by between 20 cents to 30 cents a share.

Nikic also sees an opportunity to generate incremental revenue from being Peloton’s primary apparel partner, though he assumes many of Peloton’s roughly seven million members buy Lululemon products. 

Nikic reiterated his “Outperform” rating on Lululemon at a price target of $420.

Nikic wrote, “At a high level, we remain bullish on LULU shares, as we believe the brand continues to have strong momentum despite a challenging macro environment, aided by their ongoing product innovation and their lack of exposure to the challenged U.S. wholesale channel (which has plagued many other brands in our coverage).”

Sharon Zackfia, who covers Lululemon for William Blair, wrote, “Overall, we expect the deal to be modestly beneficial to Lululemon in the near term, stemming the losses from Mirror while adding additional revenue as Peloton’s primary apparel partner, alongside a potential longer-term wildcard related to incremental brand awareness as a result of the deal.”

Zackfia, who has an “Outperform” rating on LULU, noted that after acquiring Mirror for $500 million in 2020, Lululemon had written it down by over $400 million while taking a more than $60 million provision on the hardware. Zackfia said, “The essential outsourcing of all fitness content to Peloton will end the distraction and likely modestly bolster profitability given ongoing expenses associated with the business.”

Beyond manufacturing apparel for Peloton, Zackfia sees Lululemon’s brand awareness, which remains at just 25 percent in the U.S., potentially getting a boost through the deal whereby select Peloton instructors become LULU ambassadors.

Randal Konik, who covers Lululemon for Jefferies, described the partnership as a “non-event” for Lululemon, given that Peloton customers likely are buyers of Lululemon, “resulting in an immaterial impact to traffic as well as the company’s overall customer TAM [total addressable market], in our view.”

Konik reiterated his “Underperform” rating on Lululemon at a price target of $250. He wrote, “LULU is a strong brand BUT in the highly competitive athletic apparel industry. We believe that consensus expectations are too high, particularly in the international and men’s segments, given rising competition and relatively low brand awareness in many international markets.”

Jonathan Komp, who covers Peloton for Baird, said the deal could be a “win-win” for both companies, writing, “The new partnership looks like an attractive opportunity for PTON to expand access to its compelling fitness content to millions of potential customers (through the >13M Essential members) offering the opportunity to convert new members, while also enhancing the apparel business. For Lululemon, offering Peloton’s digital fitness content should enhance the member experience and increase efficiencies, helping to reduce content creation costs.”

Komp has a “Neutral” rating on Peloton at a price target of $7.

At UBS, analyst Arpine Kocharyan, who covers Peloton, believes the deal acknowledges Lululemon’s challenges in growing its hardware business, including a limited capacity to develop content. LULU saves money from no longer producing digital content and also gains access to Peloton’s subscriber base with the companies believing there’s little overlap between Peloton subscribers and Lululemon customers.

For Peloton, the partnership furthers the fitness company’s goal of simplifying its business by outsourcing its apparel business, which was likely losing money to a premium partner. Assuming a “rather generous estimate” of $400 million to $500 million of total apparel revenue opportunity from co-branding, UBS estimated profit potential for Peloton in the range of $50 million to $60 million. However, Kocharyan said the key for Peloton is converting digital app users under the program to connected fitness subscribers. 

Kocharyan noted that Peloton has about 6.5 million connected fitness subscribers while Lululemon has 13 million under its free Essential membership program and estimated that Lululemon had less than 250,000 paid Mirror subscribers. She wrote, “While enhancing the digital app strategy, the question of successful conversion still remains: would co-branding and exposure to Peloton digital content drive meaningful conversion to connected fitness subs?”

Kocharyan maintained his “Sell” rating on Peloton at a $4.00 price target.

Bernstein analyst Aneesha Sherman, who covers both Peloton and Lululemon, noted benefits for both sides of the deal, writing, “By leveraging one another’s capabilities, LULU and PTON are sensibly throwing in the towel on two failed business ventures outside their core competencies—Lululemon’s attempt at creating digital workouts and Peloton’s expansion into fitness apparel.”

Sherman said that while Lululemon benefits from moving on from its failed Mirror experiment and reduces related costs, Peloton’s shift to in-house apparel production has similarly underperformed.

In the near term, the implications are minor, with Lululemon seeing some benefit from selling co-branded apparel at Peloton stores while Peloton gains some revenue from each Lululemon Studio member who uses its workouts. 

Sherman added, “The bigger benefit to both brands is around LT brand equity and customer acquisition. PTON expects an uptick in traffic to its stores and website as a result of LULU members using its workout app, including 13m free members being offered free PTON workouts. The addition of PTON will likely boost the credibility of Studio, ramping up membership and retention, with the hope of members continuing to buy LULU products and engage in the brand’s online community.”

Sherman has a “Market Perform” rating on Lululemon at a price target of $366 and an “Outperform” rating on Peloton at a target price of $13.

Photo courtesy Lululemon