W.When considering stocks in clothing or sportswear companies, you need to consider metrics beyond the usual. Of course, important things like sales and earnings play a role as well as the valuation of the stock, its P / E and its PEG ratio. The company’s balance sheet and the quality of management also always play a role. However, when it comes to apparel and other equipment stocks, one thing beats all of these metrics: trendiness.
These products are primarily aimed at a moody demographic, and what’s hot one year can easily turn ice cold the next with a different brand taking center stage. Therefore I will hold on to my position in Lululemon and even expand it (LULU) for their great earnings, and that’s why I don’t trust the jump into Nike (FROM) we see this morning as the answer. This looks like an opportunity to sell more than anything.
Lululemon stock is up over ten percent in early trading after significantly exceeding expectations for both sales and revenue. They are way ahead of their previous forecasts and are well on the way to achieving the sales target set for the end of 2023 by the end of this year. Those are spectacular numbers and I’m excited to see them as a shareholder, but does that mean others in the industry will break records too?
Lululemon’s success is due in part to an expansion in what is known as “athleisure”, comfortable clothing that replaces more formal clothing even in the office. This trend obviously benefits everyone in the industry, but something else is happening here too. I’ve said in the past that while anecdotal evidence is of limited use to trading and investing in general, I trust what my three children, ages 18-26, tell me about this particular market. If you believe them and, above all, their purchases, Nike loses its appeal and is replaced by Lululemon for clothing and New Balance for shoes. On the “back to school” wish lists for the youngest two were Lululemon shorts, tops and leggings for my daughter, and in both cases special New Balance shoes. There was no Nike product in sight.
Yes, let’s get the obvious out of the way: this is a ridiculously small sample size. A family doesn’t make a trend. But if I were a Nike shareholder, which I am not, I would have been concerned that two teenagers who had a passion for Nike for years switched to other brands. On the other side of the coin, however, Lululemon’s successful transition from a yoga equipment company with a limited population to a maker of trendy shorts and t-shirts that appeal to both male and female teenagers indicates potential for further rapid growth.
The fact that Nike has managed to stay trendy and popular for so long in a market where popularity itself is so often negative is remarkable, and I don’t want to detract from their performance in any way. It’s just that once you’ve achieved that kind of thing global market When Nike has saturation, its growth opportunities are inherently limited. An emerging brand like Lululemon, on the other hand, has plenty of room for expansion. Given that LULU’s price-to-earnings ratio (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 got used to working remotely and therefore in a more informal environment. Even with these workers returning to the offices, there seems to be a penchant for casual wear, which opens up some great opportunities in the athleisure space. Nike will undoubtedly benefit from this to some extent, but the trend towards other brands makes me tend to buy LULU on every pullback this morning but avoid NKE on its sympathy rally.
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