When considering stock in clothing or athletic wear companies, there are metrics to consider beyond the usual. Of course, important things like sales and profit matters, as does the valuation of the stock, its P/E and PEG ratio. The company’s balance sheet and the quality of management always factor in too. With apparel and other gear stocks, though, one thing beats all of those measurables: trendiness.
These products are primarily aimed at a fickle demographic, and what is hot one year can easily become stone cold the next as another brand takes center stage. That is why I will be holding onto, and even adding to my position in Lululemon (LULU) after their great earnings, and it's why I don’t trust the jump in Nike (NKE) we are seeing this morning in response. That looks like an opportunity to sell more than anything.
Lululemon stock is up over ten percent in early trading after substantial beats of expectations in terms of both sales and revenue. They are way ahead of their previous forecasts and are on track to hit the revenue target they set for the end of 2023 by the end of this year. Those are spectacular numbers and, as a shareholder, I’m delighted to see them, but does it mean that others in the industry are about to break records too?
Not necessarily.
Lululemon’s success is to some extent predicated on an expansion in what has become known as the “athleisure” market, comfortable clothing that is replacing more formal wear, even in office settings. That trend obviously benefits everyone in the sector, but there is something else going on here too. I have said in the past that while anecdotal evidence is of limited use in trading and investing generally, I do trust what my three kids, ranging in age from eighteen to twenty-six, tell me about this particular market. If they, and more importantly their purchases, are to be believed, Nike is losing its appeal and being replaced by Lululemon for clothing and New Balance for shoes. The “back to school” wish lists for the two youngest included Lululemon shorts, tops and, for my daughter, leggings, and, in both cases, specific New Balance shoes. There was not a Nike product in sight.
Yes, let's get the obvious out of the way: That is a ridiculously small sample size. One family doth not make a trend. But if I were a Nike stockholder, which I’m not, it would have worried me that two teenagers, whose preference used to be Nike for years, moved on to other brands. On the other side of the coin, though, the successful transition of Lululemon from a yoga gear company with a limited demographic to a maker of trendy shorts and t-shirts that appeal to both male and female teenagers points to potential for further rapid growth.
The fact that Nike has managed to remain trendy and popular for so long in a market where popularity itself is so often a negative is remarkable, and I don’t want to diminish their achievement in any way. It’s just that once you achieve the kind of global market saturation that Nike has, growth opportunities are inherently limited. An emerging brand like Lululemon, on the other hand, has a lot of room for expansion. Given that, even though LULU’s forward P/E (around 57) is about 50% higher than Nike’s (around 39), it still looks more reasonable.
The pandemic changed the work environment forever as people became accustomed to working remotely and therefore in a more casual setting. Even as those workers return to offices, a preference for casual wear seems to be sticking, making for some great opportunities in the athleisure space. Nike will no doubt benefit from that to some extent, but the trend towards other brands makes me inclined to buy LULU on any pullback this morning, but to avoid NKE on its sympathy rally.
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Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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