Athleisure boom offers edge to premium retailers

On Holding AG

18/01/2024 09:46

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own.)
    By Karen Kwok
       LONDON, Jan 18 (Reuters Breakingviews) - The athleisure
boom is offering a buffer to a breed of premium brands. Wealthy
shoppers hit by inflation have turned their attention from
luxury goods to less expensive premium clothing that is suitable
for both sports and leisure activities. This has placed the
likes of $59 billion yoga pants maker Lululemon Athletica
 LULU.O  on a higher footing than Nike  NKE.N .
    Recent sportswear retailer earnings have exposed two
different trends. On the one hand, premium brands like Lululemon
and Roger Federer-backed On  ONON.N  have raised revenue
guidance thanks to shoppers paying full whack for $130 leggings
or $200 shoes. On the other, $159 billion Nike expects weaker
demand and has pencilled in a mere 1% rise to its full-year
revenue. To protect margins, it is cutting $2 billion worth of
costs.
    Premium brands appear immune to these headwinds. Affluent
shoppers in the United Kingdom, for example, spent 79% of their
cash on discretionary items last year, according to Mastercard’s
data. But instead of splurging on luxury goods like a 2,000
pound Burberry  BRBY.L  trench coat, wealthy consumers are
buying leggings and pricey hoodies that they can wear during
hybrid working days. American consumers are also more willing to
pay full price for premium athleisure brands than for Nike and
Adidas  ADSGn.DE , according to a December dbDIG Athleisure
Survey. One reason is that shoppers expect discounts from big
sports retailers like JD Sports Fashion  JD.L  and Foot Locker
 FL.N , which are sitting on more than six months of excess Nike
and Adidas stock, according to Deutsche Bank analysts.
    Diminished demand will stall sales and eat into margins.
Analysts polled by LSEG forecast that Nike’s revenue will grow
by an average of 4% over the next two years, which is nearly
half the expected growth of the global sportswear market,
according to Euromonitor International forecasts. Meanwhile,
sales at Lululemon and On are expected to grow 12% and 25%
respectively in the same period. Lululemon’s EBITDA margin is
also expected to hover above 25% in the next five years,
compared to Nike’s 15%.
    These weakened prospects are reflected in Nike and Adidas’s
valuations. Lululemon and On, on average, are trading at a
premium of 29 times their expected earnings in 2025, surpassing
Nike and Adidas, which are valued on 21 times, LSEG data shows.
The latter group’s sponsorships of major sports events like the
2024 Paris Olympics may give them a much-needed boost, but
without a longer-term strategy they will struggle to close the
valuation gap.  
    Follow @karenkkwok on X
    

    
    CONTEXT NEWS
    Lululemon Athletica on Jan. 8 raised its sales outlook and
said it expects net revenue of $3.17 billion to $3.19 billion
for the fourth fiscal quarter, up from a previous range of
between $3.1 billion and $3.17 billion.
    JD Sports Fashion on Jan. 4 warned its annual profit before
tax will be 915 million pounds to 935 million pounds ($1.16
billion to $1.19 billion) for the year ending Feb. 3, down from
a previous forecast of 1.04 billion pounds. The retailer, which
sells Nike, Adidas and other sports fashion ranges, said softer
demand and more promotional activity than expected dented gross
margins in the peak 22-week period ended Dec. 30.

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 (Editing by Aimee Donnellan and Streisand Neto)
 ((For previous columns by the author, Reuters customers can
click on  KWOK/ 
karen.kwok@thomsonreuters.com; Reuters Messaging:
karen.kwok.thomsonreuters.com@reuters.net))