Industry Spotlight

Nike, Under Armour, Lululemon: which share price is the best athleisure bet?

The athleisure market still has a way to go before revenue streams run dry. Just look at sneaker and sports apparel giant Nike’s [NKE] share price: now five times more valuable than it was a decade ago, its growth remains on a steady trajectory as consumers find more occasions to don sportswear. 
 
Globally, this sector is forecast to grow by more than 45% between 2017 and 2023 to $512bn, according to data from ResearchandMarkets.com, placing apparel industry stocks like Under Armour [UAA] and Lululemon Athletica [LULU], alongside Nike, in the spotlight. 
 
How do the trio’s stocks compare, and what strategies do they have in the bag to spur growth?
 
 
Nike focuses on innovation, speed and distribution 
 
Nike is by far the largest company out of the three. In the most recent quarter, it reported revenues of $9.6bn – representing a 7% increase from the previous quarter. Indeed, the Oregon-based company has been defying the wider retail industry’s struggles, which saw a 24% slump in earnings in the first quarter, according to analysis by Retail Metrics.
 
Nike’s success in the current retail climate is mainly down to CEO Mark Parker’s directional shift back in June 2017. In a bid to reduce its reliance on brick-and-mortar retailers, Parker overhauled the business to focus more on selling products directly to consumers through its own e-commerce channels. 
 
The company, which has a market cap of $131.81bn, has managed to sell more items online at full price through its ‘consumer direct offense’ strategy, which not only allows it to get product to customers more quickly but has also preserved its margins; the company’s gross margin increased by 130 basis points to 45.1% in its most recent quarter. 
 

$131.81bn

Nike's market cap

Looking ahead, Nike will want to display strength as it nears its fourth quarter earnings announcement on 27 June. Analysts expect it to report earnings of $0.67 per share, which would indicate a year-over-year decline of 2.9%. On the other hand, Zacks expects annual EPS to reach $2.54 this year and $3.02 by 2020, suggesting an 18% year-over-year increase.
 
Ultimately, with Nike sporting an inflated P/E ratio of 32.62, compared to the industry’s 24.34, investors appear to be supporting its continued momentum.
 
 
Lululemon’s ‘power of three’ strategic plan 
 
As one of the largest names in the market, Lululemon’s well-known yoga apparel has been key to consistently growing its revenue each year since its 2007 public offering. The company has seen earnings grow 27% year-on-year over the last three years, with revenue increasing about 16% per year. 
 
Indeed, Lululemon topped analysts’ forecasts in its first quarter results on 12 June. It reported a 34.5% increase in EPS to $0.74 and a 20% rise in revenue to $782.3m, beating Zacks’ estimates of $0.71 for EPS and $757.1m for revenue.
 
 
Market cap$24.25bn
PE ratio (TTM)48.85
EPS (TTM)3.81
Quarterly Revenue Growth (YoY)20.40%

Lululemon share price vitals, Yahoo finance, 18 June 2019

 

As a result of the strong earnings growth, the Canadian company raised its full-year revenue forecast to between $3.73bn and $3.77bn from a previous outlook of $3.7bn and $3.74bn.

Lululemon sees growth beyond sales of its flagship leggings in the near future, too. The company believes it can double both menswear and digital sales, and quadruple international sales as part of its ‘power of three’ strategy, which CEO Calvin McDonald outlined on 24 April.
 
 
Under Armour remains committed to its roots
 
Under Armour’s $11.37bn market cap and $1.21bn in revenue in the first quarter of 2019 makes it the smallest of the trio and in turn the most vulnerable to industry struggles. With flat sales in its stores across North America, the Baltimore-based company is forecasting a modest 3-4% increase in revenue for its full year results.
 
Despite Under Armour jumping into the athleisure trend much later than peers Lululemon and Nike, its sales have picked up noticeably since it began selling athleisure clothing in 2016, but its home market remains saturated by competition. 
 
This uptick is the result of a five-year turnaround strategy referred to as CEO Kevin Plank’s ‘protect and perform’ plan. Part of the company’s efforts to turn things around have included cutting staff, trimming inventory and focusing more on women’s items as well as shoes. However, some analysts believe that this strategy does not allow Under Armour to tap into the yoga pants and casual-wear trends as much as its rivals.
 
 
Who wins at efficiency? 
 
When it comes to inventory turnover rate, yoga apparel specialist Lululemon’s 3.96 outperforms both its peers and the industry’s average of 1.29, but the company has clearly been impacted by the retail industry’s slowdown in traffic. In 2011, Lululemon had an incredible inventory turnover of 12; it has fallen steadily since then.
 
Nike is close behind with 3.8, while Under Armour’s 24% inventory fall to $875m in its most recent quarter leaves it lagging behind with a current inventory turnover rate of 2.39.
 
 
Growth race: comparing share price performance  
 
A three-day climbing streak at the start of June has put Under Armour’s stock ahead of Lululemon when it came to growth, although across the year-to-date both have risen by more than 44%, trading at around $23 and $174 respectively so far this year. 
 
Behind them is Nike, with its modest 10.87% year-to-date rise to $83. But with its return on investment outpacing the sector’s 11.31 (TTM) at a massive 25.26, shareholders are being rewarded for their faith in the heavyweight. 
 

10.87%

Nike's year-to-date share price increase

Lululemon also has a relatively high return on investment at 27.68, while Under Armour’s 7.64 significantly underperforms the sector average. 
 
With Morgan Stanley expecting global sales in the athleisure market to hit $320bn this year, companies like Nike, Lululemon and Under Armour look on track to reach their sales targets. But with such diverging metrics from business to business, traders should watch each company closely to properly understand who has the best chance of realising their share prices’ potential in the short-term.

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