🏋️‍♀️ Is Lululemon Swooshed By Nike?

Crocs expects Q4 sales to rise 42%.

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🏋️‍♀️ Lululemon: Where’s The Lemonade?

2022 hasn’t begun on an auspicious note for athletic apparel retailer Lululemon Athletica Inc. (LULU). Nike (NKE) has filed a lawsuit against the company’s Mirror Home Gym, alleging that it infringes on six of its patents. Shares have dropped 10% in the first week of the year. Omicron has hurt too. Can things turn around? (Tweet This)

When Life Gives You Lemons…

In 1983, Nike filed for a patent on a device that determines the speed of a runner, distance covered, the time elapsed, and the number of calories burnt. Leveraging this patent, it launched the Nike Training Club in 2009 (its first iPhone app) and the Nike Run Club App, which was launched in August 2016.

As people worked out at home during the pandemic, demand for home-bound gym equipment shot through the roof, benefitting companies such as Peloton (PTON). Another beneficiary of this trend has been Lululemon, the seller of yoga wear which transformed into a seller of lifestyle apparel and accessories.

To cater to the at-home-gym trend, Lululemon acquired fitness company Mirror for $500M in cash in June 2020, having invested $1M in mid-2019. Mirror offered live classes through its wall-mounted mirror device, in addition to on-demand workouts and one-on-one personal training sessions.

Since then, Lululemon has showcased Mirror across 200 stores in the US and Canada. The Mirror retailed for $1,495, and subscribers paid $39 per month to stream live sessions. Lululemon had expected Mirror’s sales in 2021 to range between $250M to $275M. But this was adjusted downward to $125M – $130M while announcing Q3 results.

That didn’t leave a good taste in investors’ mouths. The management had also projected Mirror to be profitable by the end of 2021. That will be known when the company reports its Q4 results.

There was also inherent tension between the target and the acquirer as post-merger integration ran into troubled waters. Things came to a head, and Mirror CEO Brynn Putnam stepped down in September. He has finally been replaced by Michael Aragon, who will take charge the following Monday. Aragon will also be the CEO of Lululemon Digital Fitness and has prior experience working with Ellation Inc. and the Sony Group.

…Will Lululemon Make Lemonade?

In November, Nike wrote to Lululemon about the patent infringement, and the latter’s management promptly dismissed the claims. Nike then filed a complaint in the US District Court in Manhattan, accusing Lululemon of infringing six patents, including technology that allows users to target specific exertion levels, compete against other users, and record their personal performance.

Nike claims Lululemon’s The Mirror Home Gym and accompanying mobile apps are causing “economic harm” and is seeking triple damages since it believes the two companies may see more sales overlap going forward.

Lululemon countered that Nike’s patents in question are overly broad and invalid and is confident of defending itself in court. At issue is also the fact that these technologies highlighted by Nike have been used for many years by players such as FitBit, Apple, etc.

Around the same time that Nike was sharpening its knives, Lululemon’s lawyers threatened to sue Peloton, accusing the company of infringing on its design patents for its strappy bra, high neck bra, cadent peak bra, and cadent laser dot leggings.

Peloton, however, drew first blood by seeking a court declaration that it has not infringed on any patents since Lululemon’s clothing designs are “too obvious” to merit patent protection. In response, Lululemon countersued Peloton seeking an injunction against Peloton’s infringement of its Intellectual Property Rights.

Lululemon’s shares haven’t moved much over the last 12-months. The twin lawsuits it’s fighting with Peloton and Nike don’t give a lot of comfort to investors, given they’re already a bit weary from sub-par Mirror projections.

For Q4, the company expects revenue at the lower end of the range $2.12B – $2.16B, while EPS will be at the lower end of the range $3.25 – $3.32. The lower guidance is courtesy of the Omicron variant, which led to short-staffed stores, resulting in shorter hours. In short, headwinds abound.

Investors would undoubtedly hope Lululemon will quickly move on from these entanglements so it can focus on building its business with the lawsuits and other distractions firmly in the rearview “Mirror.”

Market Reaction
LULU ended at $348.43, down 1.91%.

Company Snapshot 📈

LULU $348.43 -6.78 (1.91%)

Analyst Ratings (32 Analysts) BUY 69%  HOLD 28%  SELL 3%

Newsworthy 📰

Aim: Moderna CEO says fall Covid-19 booster shots will likely target Omicron (MRNA +9.28%)

Strong: Crocs sees Q4 sales up 42%; CEO says 2021 was “exceptional year” (CROX -2.47%)

Near IPO Price: Rivian shares decline on 2021 production and executive departure (RIVN -5.61%)

Later Today 🕒

  • Albertsons Companies Inc. Earnings (ACI)
  • TD Synnex Corp. Earnings (SNX)
  • 8:30 PM IST: Fed Chairman Jerome Powell Confirmation Hearing

Today’s Market Terminology: Margin Call

A Margin Call is a demand for additional funds due to adverse price movement. A margin call is triggered when the value of the investor’s account falls below a certain percentage requirement

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