As the weather warms up, people are getting more active and outdoor health and fitness activities are surging. It’s also the time of year when activewear companies roll out new lines to capitalize on the rising demand.
Over the years, sportswear has evolved into a staple of everyday lifestyle, commonly known as activewear or athleisure. Its growing popularity beyond athletic settings reflects shifting consumer preferences. It’s little surprise that the global activewear market is expected to grow significantly from $320 billion in 2022 to $450 billion by 2028, with an annual growth rate of nearly 6%.
Leading brands are becoming more creative in combining fitness with fashion, offering high-performance apparel suitable for both casual wear and sporting pursuits. The following companies in Morningstar’s coverage universe are well-positioned to bounce back when the current headwinds of stubbornly high inflation and the resultant slump in consumer spending start to abate.
Adidas ADDYY
Analyst: David Swartz
- Forward Dividend Yield: 0.3%
- Fair Value Estimate: USD 90.00
- Price/Fair Value: 1.39
- Economic Moat: Narrow
- Capital Allocation Rating: Standard
- Morningstar Rating: 2 stars
Sportswear heavyweight Adidas makes and markets athletic and leisure apparel, footwear, accessories, and sports equipment across 160 countries. Its impressive product portfolio comprises apparel for competitive athletics, activewear, and casual fashion.
“We think Adidas is a leader in athletic and athleisure apparel with a narrow moat based on an intangible brand asset,” says a Morningstar equity report.
While the firm has been hobbled by problems in the recent past, its “Own the Game” plan for 2021-25 promises progress.
Prospects for Adidas' e-commerce are particularly attractive. It’s now “available in about 67 countries, generated about EUR 4 billion in sales in 2023 (roughly 19% of its total sales), and we project this will exceed EUR 9 billion and 30% of its yearly sales by the end of this decade,” says Morningstar equity analyst David Swartz
The firm's new sportswear line and its strategy to strengthen its presence in key areas like running and outdoor activities are poised for success, adds Swartz, who upped the stock’s fair value to US$90 from US$89 per ADR, prompted by better-than-expected quarterly results.
In the long term, the growth of Adidas’ direct-to-consumer business is expected to boost its margins as its contribution to overall sales should rise from approximately 19% in 2023 to 41% in 2033.
Swartz forecasts higher sales growth rates in Greater China (10-year compound average sales growth rates of about 13%) and emerging markets (4%), on the back of a growing middle class with disposable income.
Ross Stores ROST
Analyst: Noah Rohr
- Forward Dividend Yield: 1.05%
- Fair Value Estimate: USD 111.00
- Price/Fair Value: 1.26
- Economic Moat: Wide
- Capital Allocation Rating: Standard
- Morningstar Rating: 2 stars
Ross Stores operates as a retailer specializing in off-price apparel and accessories, with the bulk of its sales generated through its Ross Dress for Less banner. The firm opportunistically procures excess brand-name merchandise made available via manufacturing overruns and retail liquidation sales at a 20%-60% discount to full prices.
Its stores, primarily located in densely populated suburban communities, stock a wide variety of products creating a treasure hunt shopping experience.
“As the second-largest off-price retailer in the US with about 30% market share, Ross Stores’ unique inventory procurement method and scale positions the firm to comfortably expand its top line at a mid-single-digit pace while fending off competition from online channels in future,” says a Morningstar equity report.
Ross is a trusted place for manufacturers and retailers to sell extra inventory discreetly. This means Ross has many options to choose from when buying products to sell. “Ross consistently stocks its more than 2,100 stores with a wide assortment of branded merchandise at bargain prices due to its plentiful vendor relationships and meticulous inventory management,” says Morningstar equity analyst Noah Rohr
Ross Stores’ wide economic moat, or sustainable competitive advantage, is underpinned by its brand and procurement-driven intangible asset and cost advantage. The characteristics “give us confidence in its ability to earn returns in excess of our cost of capital for years to come,” says Rohr, who recently raised the stock’s fair value to US$111 from US$109, incorporating strong fiscal 2023 fourth-quarter results.
Lululemon Athletica LULU
Analyst: David Swartz
- Forward Dividend Yield: None
- Fair Value Estimate: USD 285.00
- Price/Fair Value: 1.06
- Economic Moat: Narrow
- Capital Allocation Rating: Exemplary
- Morningstar Rating: 3 stars
Canadian yogawear maker Lululemon Athletica sells athletic apparel, footwear, and accessories for women, men, and girls. Its product portfolio of athleisure clothes includes pants, shorts, tops, and jackets for both leisure and athletic activities such as yoga and running.
The company also sells fitness accessories, such as bags, yoga mats, and equipment through over 700 outlets across 20 countries and online stores.
Lululemon is following a strong strategy of increasing the variety of products it offers and expanding its geographic reach while focusing on its core business. “While there are many firms looking to compete in its categories, Lululemon benefits from the athleisure fashion trend and will continue to achieve premium pricing due to the brand’s popularity and the styling and quality of its products,” says a Morningstar equity report.
The firm’s five-year plan laid out in 2022 focuses on three key priorities - product innovation, e-commerce, and international expansion.
Lululemon has a particularly attractive opportunity beyond North America evidenced by the fact its sales outside the Americas accounted for just 21% of its 2023 total, up from 16% the year before.
“Lululemon is building its brand overseas and has a large opportunity for new stores and larger online sales in China, the second-largest activewear market,” contends Swartz, who lifted the stock’s fair value to US$285 from US$278, reflecting better than expected fourth-quarter sales and margins.
