Category Archives: Sportswear

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Sportswear: A Different Global Warming Trend


  • Sports apparel and footwear sales have jumped 42% in the seven years and the trend is continuing.
  • The industry has a higher PE ratio than the market, but offers individual investing opportunities.
  • There is no sportswear ETF so only individual investments are available for investors wanting to be part of the growth.

Introduction

The sportswear industry has been one of the fastest growing industries in this decade, building on the developing trend of sporting, healthy living and fashionable clothes, or the so called ‘athleisure’ trend. The trend is expected to continue as it spreads globally and sportswear sales are expected to hit $300 billion in 2017.

The US is still the largest market but developing economies are the most active as alongside smartphones, sportswear gives a cheaper and faster way of feeling modern and cool. The growth opportunity comes, for example, from the fact that per capita spending on sportswear is 6 times higher in Japan than in China. The biggest global players on the sportswear field are Nike Inc. (NYSE: NKE) with almost $32 billion in sales, Adidas with almost $20 billion in sales and Under Armour (NYSE: UA) that is quickly catching up with growth rates of around 30% and sales of $4.2 billion. All of the above had spectacular growth in the last few years, with a yearly average of 25% for UA and around 10% for the bigger Nike and 7% for Adidas.

1 figure adidas, nike UA sales
Figure 1: Adidas, Nike, Under Armour sales growth by year. Source: Company filings.

In total, sports apparel and footwear sales have jumped 42% in the last seven years to a total of $270 billion. The question most investors want to know is whether the growth will continue and what the price to pay is for such an investment.

Growth Opportunity

In fashion there are many fads and a few trends. A fad is an intense, short-lived and widely shared enthusiasm for something, think of brands like Crocs (NASDAQ: CROX) or UGGs (NYSE: DECK), while a trend is a long lasting development or change in the way people behave.

Sporting has really developed into something that is changing the way we live. More and more teenagers are playing sports, and as they move into their prime apparel and footwear buying years they should further fuel consumption growth.

2 figure high school
Figure 2: Percentage of high school boys and girls playing sports. Source: Morgan Stanley.

From a global perspective, seeing that Asia is expected to triple its middle-class population by 2020, opportunities are even bigger than in the US. Nike’s current market is about $3 billion, and the company expects it to become $4 billion by 2020 as the brand will be available in more countries and have a larger geographical reach with global ecommerce.

Ecommerce business is going to play a big role in sportswear development and will create high barriers to entry for smaller brands as global ecommerce sales require high visibility, brand recognition, and large investments in supply chains. Apart from ecommerce developments in new technologies like 3-D printing, new knitting machines and automation, are also going to aid bigger players as they have the technology and capital to develop those fields.

4 figure NKE 3d printed shoe
Figure 3: Nike’s partly 3-D printed shoe. Source: Nike.

All of the above developments alongside global economic growth should make sportswear sales grow by at least 5% a year in the next 5 years. Nike expects a faster growth rate of 10%, while Under Armour expects to grow even faster at 25% per year.

3 figure sales estimates 5 year
Figure 4: Expected sportswear growth by continent. Source: Morgan Stanley.

Growth in the US will still be strong but is expected to slow down, while Europe, Asia and Latin America are expected to be the drivers of global sales growth. This is logical as most of the global economic growth is expected to come from developing countries. As there is a high probability of the sportswear trend continuing with its growth path and really changing the way we live, a look at fundamentals will show if it could also be a good investment.

Fundamental Analysis

Sportswear brands are valued higher than the market, but also their 15.09% average yearly growth has been much higher than the market’s. Lululemon and Under Armour’s PE ratios are the highest which is also logical due to their stellar growth, while Puma is finding it difficult to grow but the market sees lots of potential and therefore the highest valuation.

Nike and Adidas are the rulers of the sportswear industry with stable high single digit yearly growth, and are not highly priced in relation to the S&P 500 average PE ratio of 24.28.

CompanyTickerPrice52-Week Range PE RatioEPSDividendPrice to Book5 Year Ave. Rev. Growth
NikeNKE$54.77$47.25 - $68.2025.5$2.161.17.59.98%
AdidasADDYY€115.53€62.76 - €117.9929.4€3.781.44.17.12%
Under ArmourUA$36.58$31.62 - $52.9466.9$0.54012.930.08%
PumaPUM.F€212.58€140 - €21785.6€2.480.224.59%
LululemonLULU$67.04$43.14 - $69.7335$1.8908.223.69%
Average48.480.546.9415.09%
Figure 5: Top sportswear brands fundamentals. Source: Morningstar.

In case the sportswear trend continues, an investment in companies like Nike sounds pretty reasonable on these levels as EPS growth of 10% per year would bring Nike’s EPS to $3.47 in 5 years and a PE ratio of 15.

Conclusion

The most important thing when investing in anything related to fashion is to accurately separate fads from trends. The athleisure trend is a global reality with lots of room still to grow, but it’s also fairly priced with the relative high valuations. Perhaps the best way of investing is to wait for increased temporary pessimism that gives good buying opportunities.

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Figure 6: Current example of pessimism – Bloomberg headline May 31 2016. Source: Bloomberg.

Nike and Under Armour are both closer to their 52-week lows than highs, while Adidas, Puma and Lululemon are close to their 52-week highs. This discrepancy shows how strange the fashion apparels world can be, but on the other hand the future trend is pretty clear. Unfortunately, there is no sportswear ETF so investments have to be assessed on an individual basis.

Sportswear brands provide good global diversification as their sales are well spread globally, except for Lululemon and Under Armour which are still mainly US oriented.