UBS: Shift From Performance To Sportswear A Dominant Theme In Athleisure

UBS took a neutral stance on athleisure retailers in a sectorwide report this week. 

The Analyst 

Analyst Jay Sole initiated coverage of the following stocks:

• Foot Locker, Inc. FL: Neutral, $59 price target.
• Under Armour Inc UAA: Neutral, $24 price target.
• Lululemon athletica inc. LULU: Neutral, $130 price target.
• Nike Inc NKE: Neutral, $78 price target.

The Thesis

By 2022, 31 percent of all apparel and footwear sales will occur online, but physical stores still play an important role as complements to e-commerce, Sole said in a Thursday note. 

Online channel sales are growing at an average of 18 percent since 2012, but the analyst sees this slowing to 7 percent by 2022. Companies with a large number of stores that play a synergistic role with e-commerce are most likely to win, Sole said. 

Athleisure should remain a good, not great trend, Sole said, adding that he expects streetwear to become the dominant athleisure theme. This is a potential positive for Foot Locker if the company can interpret the trend properly for its customers, he said. 

Direct-To Consumer-Shift Hurts Foot Locker

Adidas AG (ADR) ADDYY and Nike's increased focus on direct-to-consumer sales is expected to weigh on Foot Locker’s comps as the brands allocate premier product to their website instead of to Foot Locker, Sole said. Because of this, Foot Locker is an accurately priced, no-growth story, the analyst said. 

Sportswear Tough For Under Armour, But Not Impossible

The shift in fashion trends to streetwear over performance has hurt fewer companies more than Under Armour. The retailer's revenues will not return to double-digit growth rates, but it can still grow, Sole said. International expansion will likely account for over 100 percent of the company’s growth, the analyst said. 

While Under Armour has struggled in adapting to the shift from performance to streetwear styles, sportswear now represents 18 percent of total apparel and footwear sales, meaning that athleisure is still broad enough for Under Armour to benefit, Sole said. 

Nike Poised To Outgrow Industry

The Nike brand is regaining momentum and is expected to outpace the industry, Sole said. The shift toward sportswear doesn't appear to affect the brand, which is mix of both performance and casual styles.

“Fortunately for Nike, sneakers are at the center of streetwear a culture and consumers accept it as a streetwear brand."

Sole calls Nike a long-term winner but said near-term outperformance is unlikely.

Lululemon's Loyal Followers Help Brand Withstand Headwinds

Although Lululemon is not seen as a streetwear brand, it has been one of the best-performing athleisure stocks in 2018, Sole said. The company can deliver 3-percent annual comp growth on average over the next five years, and developing markets will account for a majority of the growth, the analyst said. 

“Lululemon has very strong brand loyalty, which should help it outgrow other brands,” he said. “Athleisure is still about comfortable and casual attire, but is moving away from performance to more streetwear styles."

While Lululemon is not a true streetwear brand, its category leadership should help it navigate the sector, Sole said.

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