Over the past year, Adidas (ADS.DE) shares have fallen almost twofold, from around $320 in August 2021 to $187 in June 2022. Our AI stock screener suggests we buy the stock now, identifying it as a value stock. Shares of Adidas’ closest competitor, NIKE, Inc. (NKE), also declined, but not that much. In November of 2021, the Nike stock reached $177 per share, but now it trades at around $120. With this in mind, we decided to take a deeper look at the sportswear market.
Athleisure Market Overview 2010-2022 | Trends
What do we know from our everyday life? The coronavirus pandemic has dramatically changed our lifestyles.
Fitness centers and gyms were among the first ones to take a blow as prolonged lockdowns forced us to spend more time at home. However, while stopping visiting public places, sports enthusiasts did not actually abandon their fitness goals, choosing to work out at home. Moreover, physical activities and exercise in the home environment became an increasing trend at the times of the pandemic.
“Now the home has become the gym — it’s become people’s space to be active. I do think that will last,” said Nicky Yates, Physical Activity and Sports Development Manager for Liverpool City Council in the UK. What does that mean for sportswear manufacturers?
At the beginning of the COVID-19 pandemic, sports goods companies saw narrower margins and a significant decline in sales. No wonder people who exercise at home were unlikely to purchase dedicated athletic apparel for that purpose. Instead, they preferred to do their workouts wearing casual leisure clothes.
Another notable trend was that people began to spend much more time in parks and beaches — running, biking, skiing, and walking. The data shows that many parks saw record numbers of visitors at the height of the pandemic in 2020. Specifically, around half of adults in the USA now take part in outdoor recreation at least once a month, and around 20% are new to outdoor recreation. And again, one may need comfortable clothes with enhanced waterproof qualities, but not necessarily special sportswear.
More importantly, the change in preferences does not boil down to clothes people wear while exercising. The rise of remote work, which was described as “the largest change in American working and living conditions since World War II,” boosted the trend of athleisure clothing. This is a type of fashionable yet comfortable clothing that combines the benefits of functionality and minimalist design — leggings, yoga pants, sweatshirts, sneakers, hoodies, and sweatpants.
When athleisure is too casual for the event, you may consider sporty-chic style. This is a type of clothing that is functional and comfortable but is more polished than the athleisure outfit. The sporty-chic style typically involves brighter colors and is not so loose.
Apparel Industry: Athleisure as a driver of growth
In fact, athleisure has officially become the high fashion in 2016, before the pandemic erupted. Athleisure was initially popularized by women who began to wear yoga pants not only in the gym but also in casual settings. Five years ago, the creative class had already embraced the trend, wearing colorful sneakers and high-end yoga pants to work.
For the apparel industry, athleisure became an essential driver of growth, given that sales of non-activewear fell in 2017. The demand for sport leisure apparel increased by 17%, while the sales of performance apparel fell by 10%. “I expect that in the upcoming years, more brands will effectively respond to the shift away from performance and fashion footwear to focus on what has become the new norm: athleisure footwear,” said Matt Powell from the market information company NPD Group.
The “sport leisure” style has become the largest category in the U.S. sneaker space, beating “performance”-oriented footwear, according to a study released this week by market research firm NPD Group. In sharp contrast, while demand for sport leisure styles surged 17% last year to $9.6 billion in sales, sales of performance apparel tumbled 10% to $7.4 billion, NPD said, adding the performance category’s decline has “accelerated” the last two years.
With the trend on the rise, the share of athleisure clothing manufacturers is now expanding like an elastic waistband in the pants they make. Lululemon Athletica Inc. (LULU) was the first company to commercialize this trend, kick-starting the new industry in the 2010s. Nike and the privately-held company American Apparel followed Lululemon and were also among the industry’s pioneers. As the market continues to grow, other famous brands, such as Levi Strauss & Co. (LEVI), picked up the trend.
In 2016, Adidas launched a new athleisure line called Adidas Athletics. While being stylish and minimalist, this clothing is designed with advanced fabrics. The new line was viewed as a direct competitor to Nike’s premium Sportswear line, which capitalized on the athleisure trend and became extremely successful.
In their marketing strategy, major brands tend to focus on high-profile celebrities. For example, Adidas has partnerships with Kanye West, Stella McCartney, and Pharrell Williams. Lululemon, on the contrary, relies more on smaller-scale Instagram influencers, yoga instructors, and fitness bloggers to advertise its products. And this innovative strategy has proved to be very effective.
Other Instagram-famous aсtivewear brands include privately-held companies Gymshark, Vuori, Alo Yoga, Athleta, Outdoor Voices, and Bandier. Additionally, some athleisure brands offer incentives for customers, such as Lululemon’s yoga videos or the Allo Move app from Alo Yoga, a private company that makes yoga clothing and accessories.
Niche yoga clothing brands have boosted their businesses with new product lines, while high-fashion brands are expanding in athleisure. Some have already launched their own luxury activewear product lines. For instance, Louis Vuitton (MC.PA), one of the world’s leading international fashion houses, has a 2021 collection of the 80’s inspired athleisure clothes. Gucci launched its women’s activewear collection, too. The Italian luxury fashion house has also announced its collaboration with Adidas to create a collection that combines vintage glamor and athleisure styles. Another high-fashion designer, Victoria Beckham, offers hooded sweatshirts, leggins, track pants, sports bra, and cycling shorts.
Problems
Meanwhile, major sportswear brands face not only rising competition from the expanding athleisure industry but also challenges related to manufacturing and logistics. In particular, the quality of the counterfeit market has been increasing, making it hard for famous brands to fight with counterfeit products. A big challenge was the supply chain as lockdowns in China and other Asian countries forced many companies to relocate production to Europe and other regions.
Last year, Adidas warned that the supply chain constraints caused by the COVID-19 pandemic could cost the company around 500 million euros in sales. That means that Adidas failed to produce a sufficient amount of apparel and footwear to meet the demand. Since the summer of 2021, Adidas’s business has been negatively affected by the closure of manufacturing facilities in Vietnam, where the company’s shoes are manufactured.
An additional strain was put by a boycott against a number of Western apparel brands in China. In July of 2020, several companies, including Nike and Adidas, expressed concerns about human rights in their supply chain. The matter concerns suppliers involved in Uyghur forced labor in the Xinjiang region, an allegation the Chinese government rejects. Dozens of Chinese celebrities have abandoned their partnerships with these companies, including Nike, Puma, and Adidas.
What to expect for tried-and-true sportswear giants like Adidas, Nike, and Reebok in 2022-2023? Is their time past and they will not withstand the competition with new Instagram brands? Or, maybe, their stocks are falling because the market is bearish and these are actually undervalued stocks? In the latter case, these stocks are likely to grow back and might be of interest to value investors who buy long-term positions.
The Outlook for the Athleisure Market
According to a report published in April by ResearchAndMarkets, the athleisure market will grow at a CAGR of 9.9% in the next five years and reach $793.46 billion by 2028. The market is divided into three major segments: top wear, bottom wear, and footwear. While the segment of bottomwear, which includes pants, leggins, etc, is the largest one, the footwear segment will grow at the fastest rate.
-
In geographical terms, North America holds the largest market share and will maintain its leading position in at least the next three years.
-
At the same time, there is robust growth in emerging markets China and India due to the expansion of the middle class in these countries and a greater engagement in sports activities. Also, Chinese customers are prone to spend more on luxury apparel and athleisure clothes in particular.
-
Europe’s share in the athleisure market is forecast to decrease out to 2025, but Eastern European countries will show significant potential.
-
The largest athleisure market in Africa and the Middle East is South Africa because sports like running and football are very popular among the country’s residents. The UAE is second in terms of the athleisure market penetration.
The major driver for the market growth is the latest trend to combine casual and athletic designs in clothes. A strong selling point is that athleisure clothes can be worn in different social environments. The growing popularity of healthy lifestyles and fitness activities in the region is forecast to boost the demand for athleisure clothing in the coming years. In particular, the data shows that searches for yoga clothing increased in the USA and consumers are looking for more fashionable and colorful options.
Working women are becoming increasingly involved in fitness activities, which will significantly contribute to the market growth. And finally, there is an increased demand from millennials because they find athleisure clothes versatile, fashionable, and are available in intricate designs and bright colors. Athleisure womenswear, primarily leggings and sweatshirts, will be the fastest-growing segment, while childrenswear will show the lowest growth.
Major Manufacturers of 2022
The global market for athleisure clothes is very competitive. Major companies are developing diversified product portfolios, combining fashionable and functional designs.
The most active market players are NIKE, Inc. (NKE), Lululemon Athletica Inc. (LULU), Adidas (ADS.DE), PUMA SE (PMMAF), Under Armour, Inc. (UA), ASICS Corporation (ASCCF), H & M Hennes & Mauritz AB (HNNMY), Columbia Sportswear Company (COLM), ANTA Sports Products Limited (2020.HK), Callaway Golf Company (ELY).
Major athleisure companies are working to increase their market shares worldwide through product innovations as well as the launch of new manufacturing facilities and stores. For instance, the Japanese performance sportswear Asics Corporation has said it would add 18 new stores to its sales network in India this year. In terms of a marketing strategy, active advertising campaigns on social media platforms are increasingly used by these companies to attract new consumers.
The COVID-19 pandemic had an adverse impact on the athleisure industry all over the world. Adidas and Nike reported a decline in consumer spendings on clothes and footwear, which was due to economic uncertainty and higher unemployment rates. Furthermore, the closure of stores and distancing requirements negatively affected the market, too. For example, the majority of NIKE brand stores in North America and internationally were closed for about two months in 2020. As a result, the company’s quarterly revenue dropped by 38% to $6.3 billion, while income was down by 49% to $2.3 billion.
On the other hand, the coronavirus pandemic opened up new opportunities for apparel manufacturers. Researchers have identified the growing penetration of e-commerce as the key market opportunity. According to a recent study, online shopping increased by 54% in the United States during the pandemic. Consumers’ transition to online clothes buying stimulated the companies to intensify their presence on e-commerce platforms. For instance, Asics Corporation now expects that approximately 40% of the company’s sales will come from the e-commerce channel.
Secondly, the coronavirus pandemic established preferences of wearing more casual clothes and habits of exercise. The London-based consultancy firm Global Data notes that the further growth of the market will be supported by the presence of more companies. That said, the growth will be in both the number of specialist athleisure brands and non-specialists companies with athleisure collections.
A special focus on diversity will continue to be a trend. A number of major companies have launched plus-size collections and start featuring more body shapes in their advertisements to attract more customers. Last year, NIKE launched a partnership with Serena Williams, a famous African-American tennis player, to attract more people of color. The new partnership is meant to promote NIKE’s collection of women's athleisure wear, which was created by a group of designers known as the Serena Williams Design Crew.
Which Brands Hold the Largest Share in the Athleisure Market?
As of 2019, Nike was the leading athleisure brand in the USA with a 20-percent market share. Lululemon came second, accounting for 10% of total athleisure sales. Baltimore-based Under Armour, Inc. (NYSE:UA) was third with 8% of market share, while 7% of the market was occupied by Athleta, a Californian private company owned by San Francisco-based Gap, Inc. (GPS).
On a global scale, NIKE is a leader, followed by Lululemon and Adidas. China-based ANTA Sports Products Limited (2020.HK) has a clear presence in outdoor sports gear and is planning to make major strides in the athleisure market.
However, in terms of sales growth Lululemon, ANTA Sports and another Chinese company, Li Ning (2331.HK), have left these two sportswear giants behind. The German PUMA SE (PMMAF) and California’s Callaway Golf Company (ELY) also have had higher sales growth compared to NIKE and Adidas. The U.S.-based V.F. Corporation (VFC), Japan’s companies ASICS Corporation (ASCCF) and Descente Ltd. (8114.T), and the U.S.-based Under Armour (UA) showed the slowest sales growth over the last years. Also, Under Armour’s CEO said recently that the company would focus more on athletic wear rather than athleisure.
In terms of future prospects, the rate of revenue growth is more important than the current level of revenue. We can, therefore, assume that Lululemon, ANTA Sports and Li Ning are likely to gain a larger market share in the coming years.
Separately worth noting FILA Holdings Corporation (081660.KS), a sportswear manufacturer based in South Korea, which was named the fastest-growing apparel brand by the consulting firm Brand Finance. However, FILA focuses on activewear, rather than athleisure clothing. The difference is that activewear is comfortable clothing suitable for sport, while athleisure wear is designed for both exercise and everyday wear.
Nike vs Lululemon: The Battle of Leaders
If we look at the two current leaders, Nike and Lululemon, they both benefited from stay-at-home policies during the pandemic and growing digital sales. Nevertheless, Forbes’ analysts believe that Lululemon’s stock is a better choice for investors despite seeming overvalued compared to NIKE’s stock. The advantage of Lululemon is that it has had better revenue growth over the recent years.
Although NIKE earns more revenues than Lululemon, the latter has had higher revenue growth over the last year. Lululemon’s revenue grew by 44%, while NIKE posted 21-percent revenue growth. Moreover, Lululemon has seen its revenues increase at an annual growth rate of 19% over the last three years, while that figure for NIKE was 7%. The analysts estimate that Lululemon’s revenue will rise by 30% in the next couple of years, which is three times more compared to NIKE’s expected 10-percent growth.
Additionally, Lululemon has been less affected by global supplies chain disruptions during the pandemic. The company’s revenue from international sales increased by 40%, while NIKE saw a decline in sales in Asia and Latin America. In terms of gross margin, Lululemon is also well ahead of its key competitor — 57% against 46%. Moreover, Lululemon has only begun exploring the potential of the Chinese market. On the other hand, Lululemon has spent significant amounts on acquisitions in 2020, which is why its operating margin over the last three years was worse than that of NIKE. That said, if we consider the last 12-year period, Lululemon reported a higher operating margin of 4.4% against NIKE’s 3.4%. In the short-term, both companies are likely to report lower margins because of further supply chain restrictions and inflation.
On June 2, Lululemon Athletica raised its full-year revenue and profit outlook thanks to robust demand for athleisure products. The company expects $7.61 billion to $7.71 billion revenue for 2022, an increase from its previous forecast of $7.49 billion to $7.62 billion. Profit is expected to range from $9.42 to $9.57 per share, whereas its previous forecast was $9.15 to $9.35. Lululemon notes that coronavirus lockdowns have had a modest impact on its operations in China and were offset by solid performance in other regions.
In terms of a debt burden, Lululemon looks more attractive than NIKE as it has no debt, while the latter has 5% debt as a percentage of the equity. On the other hand, Lululemon has only 22% cash as a percentage of assets, as compared to NIKE’s 39%, meaтing the former has a worse cash position but is at an advantage when it comes to debt. Also, Lululemon has reduced its diluted shares outstanding by around 7% over the last five by carrying out stock buybacks. On March 23, 2022, the company’s board of directors approved a new stock repurchase program for around $1 billion of its common shares.
What Are the Prospects for Adidas?
In the sportswear industry, Adidas is the second-largest in the world after Nike and first in Europe. In terms of technology, NIKE focuses on the use of light materials, while Adidas prioritizes the quality of products and innovations. The company’s first athleisure line called Adidas Athletics was launched in 2016, which was viewed as challenging NIKE’s growing penetration into that market. In its 2021 financial report, Adidas has noted that after the recovery from the COVID-19 pandemic in 2021, the company expects strong top-line growth to continue this year, despite all existing risks, including geopolitical tensions. One of the long-term growth drivers will be the growing penetration of “athleisure”.
At the same time, Adidas is getting rid of less profitable assets. Earlier this year, the company sold Reebok to the private company Authentic Brands Group for up to 2.1 billion euros. Adidas acquired Reebok in 2006 to compete with its rival Nike but decided to sell the subsidiary because of its poor performance compared to the core Adidas brand.
When compared to Nike, Adidas has lower revenue growth of 16%. Nike is also a much larger business with total revenues of $44 billion versus $25 billion in revenues posted by Adidas in 2021. In terms of profitability, Adidas has a higher gross margin of 50.7%, while its operating margin grew 5.3 percentage points to 9.4%. Net income from continuing operations reached 1.492 billion euros, representing 223% growth year-over-year. The company has also repurchased its shares in an amount of 1 billion euros.
Speaking about its forecast for the period between 2021 and 2025, Adidas noted that it expected revenue to grow at a CAGR of 8%-10%. By 2025, gross margin was forecast to be further expanded to between 53% and 55%, while operating margin will reach 12%-14%. Adidas expects its revenues from e-commerce sales to rise twofold to up to 9 billion euros.
Based on the company’s statements we can assume that Adidas will pay a greater attention to the athleisure and may try to gain a large market share. “We will increase brand credibility by sharpening the edges of Adidas on both ends of the spectrum – in sport and in lifestyle,” the report says. “With the introduction of Adidas Sportswear as a new consumer proposition, we are addressing the growing relevance of the athleisure trend toward sport-inspired leisurewear”.
Anyway, NIKE, Lululemon, and Adidas are the three most promising players in the athleisure market. “Analysts say an athleisure boom is being fueled by a desire for comfort and a newfound interest in health and wellness,” CNBC observer notes. “But consumers are also interested in style and fashion, which is why Nike, Adidas and Lululemon are doing so well”.
Athleisure Stocks: Growth Potential
If we look at these companies from the perspective of their stocks’ potential, Under Armour, Inc. (NYSE:UA) might seem to be the best choice. Based on a 12-month price forecast of 18 analysts, the median price target for the stock is $15.5 or a 56% increase from the current price, with a buy recommendation. However, we would not recommend considering this stock for two reasons.
First, Under Armour has previously decided to sit out the athleisure wave and direct its efforts towards performance. There are no indications that the company will increase exposure to athleisure in the near future. Secondly, over the last five years, Under Armour has had slow revenue growth, ranging from 1.5% to 3% in the period from 2017 to 2019. Last year, the company posted a dramatic increase of 27% but that was a rebound after a 15-percent decline in 2020 and should not be viewed as a trend. Since November of 2021, the stock price has fallen nearly twofold.
Among athleisure brands, shares of Callaway Golf Company (ELY) seem to be a promising pick for investors. The median price target for the stock is $34 or a 52% increase from the current price. Today, the stock trades below the low price target of $24 and has a buy rating from analysts. The high estimate for the stock’s future price is $55. Callaway Golf is a Californian company that produces sports equipment, primarily for golf, and clothes, such as pants, shorts, and sweaters. The growth of golf is propelling the athleisure fashion market, and Callaway is in the market, too, with its versatile athleisure golf apparel. In 2019, Callaway acquired the Germany-based Jack Wolfskin apparel brand to broaden its product line and increase its presence in the active lifestyle category.
In terms of revenue growth, the company looks pretty interesting. From 2017 to 2019, Callaway’s revenue was growing at a rate of 19%-37% and, following a 6-percent decline in 2020, showed an impressive 97%-increase last year. In the first quarter of 2022, the company reported a 59-percent increase in net revenues to $1,040.2 million, while adjusted EBITDA was up by almost 33% to $169.8 million. Callaway has also raised its full-year 2022 revenue and EBITDA outlook.
As for Lululemon, NIKE and Adidas, their stocks have to buy ratings from analysts and considerable growth potential of more than 30%. In this regard, Adidas looks more attractive with a median price target of $137, which represents a 38% increase from the current price of $95. The high estimate is $189, while the low estimate is $81. NIKE comes second with a median target of $160, representing an increase of 33% from the last price. It is noteworthy that currently NIKE stock trades at a price of $118 per share, below the low price target given by analysts. Lululemon Athletica Inc has a median target of $408 with a growth potential of 32%. The high estimate is $505, while the low price target is $300, which is where the stock is trading now.
Another athleisure stock worth considering is Columbia Sportswear Company (COLM), a company engaged in the production of outdoor and everyday lifestyle apparel. The median price target for the stock is $103, which represents a 32-percent increase from the current price. Although the stock currently trades below the low estimate of $77, analysts give it a hold rating. In the first quarter of 2022, the company’s net sales rose by 22% to a record $761.5 million, while diluted earnings per share were up by 23% to $1.03.
The German company PUMA SE (PMMAF) has a median price target of $106, meaning a 26% growth potential for the stock, while Chinese ANTA Sports and Li Ning have growth potential of 27% and 29%, respectively, based on the median price targets.