Three sportswear stocks set to score

Global activewear is projected to grow at an annual rate of 6.5% from 2018-2024, and these companies are likely to benefit

Vikram Barhat 26 June, 2019 | 3:00AM

Soccer

High-profile sporting events serve as a giant billboard for athletic wear. Strategically placed logos of sportswear brands plastered across players’ uniform and around the sporting arena were hard to miss when Toronto Raptors won the NBA championship. Quick to sense the consumer mood of the moment, sportswear manufacturers wasted no time in flooding the market with sporting merchandise.

Sportswear is increasingly becoming part of lifestyle. Often referred to as activewear or athleisure, its popularity beyond sporting venues is a testament to changing consumer tastes. Companies in the sports apparel and accessories industry have been quick to capitalize on the trend and improve their profitability through new revenue streams. The global activewear market is projected by Allied Market Research to balloon from US$351 billion in 2017 to US$546 billion in 2024, growing at a 6.5% clip from 2018 through 2024.

As demand for everyday activewear grows exponentially, leading brands are getting increasingly innovative in bringing together fitness and fashion in their offerings of high-performance gear for casual and sporting activities. The following companies with strong fundamentals, brand awareness, consumer affinity, and impressive product mix are well positioned to tap into a booming athleisure market, according to Morningstar equity research.

Nike Inc Class B
  Ticker: NKE
  Current Yield: 1.07%
  Forward P/E: 26.39
  Price: US$83.41
  Fair Value: US$98
  Fair Value Uncertainty Medium
  Value: 16% Discount
  Moat: Wide
  Moat Trend: Stable
  Star Rating: ****
Data as of Jun. 19, 2019

The company behind the ubiquitous ‘swoosh’ logo, Nike (NKE) is the largest athletic apparel and footwear brand in the world. The company, whose ‘just do it’ tagline is globally recognized, sells to 30,000 retailers across 190 countries.

Nike’s revenue nearly doubled in the past 10 years to US$36.4 billion in 2018, 65% greater than that of its closest competitor Adidas. Although performance athletic shoes (US$22.3 billion in 2018 sales) are wide-moat Nike’s biggest revenue generator, the firm is also the leader in athletic apparel, producing about US$2 billion more in apparel revenue than Adidas in 2018, according to a Morningstar equity report. “No athletic apparel company will be able to approach Nike’s global market share in at least the next 20 years,” the report says.

Nike is investing heavily in its digital services to boost e-commerce revenue. “We estimate that Nike generated about US$2.5 billion in e-commerce sales from its digital marketplaces in 2018, up from about US$1.5 billion in 2015,” notes Morningstar equity analyst, David Swartz, who projects digital sales to account for 30% of Nike’s total sales by 2023, led by developing markets where internet penetration is increasing. Herecently raised the stock’s fair value from US$80 to US$98.

Adidas AG ADR
  Ticker: ADDYY
  Current Yield: -
  Forward P/E: 111.1
  Price: US$150.62
  Fair Value: US$113
  Fair Value Uncertainty Medium
  Value: 36% Premium
  Moat: Narrow
  Moat Trend: Stable
  Star Rating: **
Data as of Jun. 19, 2019

German sportswear giant Adidas (ADDYY) makes athletic and leisure apparel, footwear, accessories, and sports equipment under Adidas and Reebok brands. The firm also owns fashion brands Yeezy and Y-3 and sells its products in over 160 countries through more than 2,300 owned retail stores, 14,000 mono-branded franchise stores, 150,000 wholesale doors, and more than 50 e-commerce sites.

A leader in athletic and athleisure apparel, the firm is projected to continue to grow in North America, “where its revenue has increased by about 50% over the past five years,” according to a Morningstar report.

While Adidas is gaining U.S. market share through fashion products and performance-sports innovations, the company’s prospects are particularly bright in China whose US$31 billion athletic apparel market represents a strong opportunity. “Adidas is viewed as a premium fashion brand with high pricing” in China where it’s steadily taking share from smaller local brands that cannot match its heft, says Swartz, who recently raised the stock’s fair value from US$112 to US$113 per ADR.

VF Corp
  Ticker: VFC
  Current Yield: 2.34%
  Forward P/E: 25.64
  Price: US$88.27
  Fair Value: US$64
  Fair Value Uncertainty Medium
  Value: 38% Premium
  Moat: Narrow
  Moat Trend: Stable
  Star Rating: *
Data as of Jun. 19, 2019

VF Corp (VFC) makes branded apparel and accessories across action sports, outdoor, and workwear categories. The company’s portfolio includes popular brands Vans, The North Face, Timberland, and Dickies, which it markets in the Americas, Europe, and Asia-Pacific through branded stores, retailers, and e-commerce.

The company has evolved from its roots as an action sports brand into a popular everyday brand on the back of three brands -- Vans, Timberland, and The North Face -- that make up a large majority of its sales. “These three brands produced 12% growth in fiscal 2019, [led by] Vans with average annual revenue growth above 20% over the past four years,” says Swartz, who pegs the stock’s fair value at US$64.

VF’s prospects are particularly attractive in China “where it experienced 22% organic growth in fiscal 2019,” says Swartz, who forecasts “China will experience annual average activewear growth of about 10% over the next decade.”

 

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
adidas AG ADR150.91 -0.40
Nike Inc B86.68 USD-1.16
VF Corp85.67 USD-1.60

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Vikram Barhat

Vikram Barhat  Vikram Barhat is a freelance writer.