Exercise Your Portfolio With These Three Athleisure Companies
This week, we use AAII’s A+ Investor Stock Grades to provide insight into three athleisure stocks. With the shift to a more comfortable and health-conscious lifestyle in the U.S., should you consider the three athleisure stocks of Lululemon Athletica Inc., Nike Inc. and Under Armour Inc.?
Athleisure Stocks Recent News
Over the past few years, athleisure clothing has started to gain popularity. Athleisure is a popular category because it taps into several broad trends, including a global shift toward consumers wearing more casual clothing, consumers seeking comfortable clothing and health-conscious consumers engaging in more athletic activities. The market is highly competitive and fierce owing to the presence of a large number of international and regional players that are striving to innovate persistently.
The global athleisure market size was valued at $306.6 billion in 2021 and is expected to grow at a compound annual growth rate (CAGR) of 8.9% from 2022 to 2030. North America captured the largest revenue share in 2021 while Asia Pacific is anticipated to witness the fastest growth over the forecast period. The yoga apparel product segment is expected to expand at the fastest growth rate. The rising popularity and benefits of yoga as a mind-body fitness activity is leading to an increase in the number of yoga enthusiasts across the world.
The athleisure segment can be broken down into two sub-segments: mass athleisure and premium athleisure. Athletic-casual clothing is becoming more widely accepted for use in a range of social settings. Thus, many luxury fashion brands have been significantly affected by streetwear athleisure trends, which are motivated by current affluent consumers’ need to mix comfort and style. To combat this, many luxury retailers launched athleisure items such as sneakers, leggings and gym accessories.
Like many retailers, the coronavirus pandemic benefited athleisure companies’ e-commerce business. Companies saw a surge in e-commerce sales as a result of lockdowns. Additionally, many companies benefited from the shift to work from home as many have opted for more comfortable work clothes.
Overall, the athleisure industry has a bright future ahead. Companies look to benefit from the rise in health consciousness and consumer fitness. More and more companies could start offering athleisure products to capture some of the industry’s growth. Widespread adoption is already underway, and companies will have to find ways to stand out to survive the already competitive industry.
Grading Athleisure Stocks With AAII’s A+ Stock Grades
When analyzing a company, it is helpful to have an objective framework that allows you to compare companies in the same way. This is why AAII created the A+ Stock Grades, which evaluate companies across five factors that research and real-world investment results indicate to identify market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality.
Using AAII’s A+ Stock Grades, the following table summarizes the attractiveness of three athleisure stocks — Lululemon Athletica, Nike and Under Armour — based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Athleisure Stocks
What the A+ Stock Grades Reveal
Lululemon Athletica Inc. (LULU) is a designer, distributor and retailer of lifestyle-inspired athletic apparel and accessories. Its segments include company-operated stores and direct to consumer. Its apparel assortment includes pants, shorts, tops and jackets designed for activities such as yoga, running, training and other sweaty pursuits. It also offers fitness-related accessories. Its company-operated stores include approximately 574 stores in 17 countries. Lululemon’s direct-to-consumer segment includes its U.S. e-commerce website, other country and region-specific websites and mobile applications, including mobile applications on in-store devices. The company also conducts business through MIRROR, which offers at-home fitness through a workout platform.
Earnings estimate revisions offer an indication of how analysts view the short-term prospects of a firm. For example, Lululemon has an Earnings Estimate Revisions Grade of B, which is positive. The grade is based on the statistical significance of its latest two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months.
Lululemon reported a positive earnings surprise for first-quarter 2022 of 3.3%, and in the prior quarter reported a positive earnings surprise of 2.8%. Over the last month, the consensus earnings estimate for the second quarter of 2022 has increased from $1.852 to $1.868 per share due to 20 upward and two downward revisions. Over the last month, the consensus earnings estimate for full-year 2022 has increased 1.1% from $9.383 to $9.488 per share, based on 26 upward revisions.
Lululemon has a Momentum Grade of C, based on its Momentum Score of 42. This means that it is average in terms of its weighted relative strength over the last four quarters. This score is derived from an above-average relative price strength of –1.1% in the second-most recent quarter, –12.1% in the third-most-recent quarter and 9.3% in the fourth-most-recent quarter, offset by below-average relative price strength of –15.1% in the most recent quarter. The scores are 33, 51, 51 and 83 sequentially from the most recent quarter. The weighted four-quarter relative price strength is –6.8%, which translates to a score of 42. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters, with the most recent quarterly price change given a weight of 40% and each of the three previous quarters given a weighting of 20%.
The company has a Value Grade of F, based on its Value Score of 86, which is considered ultra-expensive. This is derived from a high price-to-free-cash-flow (P/FCF) ratio of 70.2 and a high price-to-book (P/B) ratio of 12.64. In addition, Lululemon has a Growth Grade of B, which is considered strong. This is derived from a strong operating cash flow five-year growth rate of 29.2% and a strong five-year sales growth rate of 21.7%. This is slightly offset by very low quarterly operating cash flow growth of –213.6%.
Nike Inc. (NKE) designs, markets and distributes athletic footwear, apparel, equipment and accessories for sports and fitness activities. Its operating segments include North America, Europe, Middle East & Africa (EMEA), Greater China and Asia Pacific & Latin America (APLA). It sells a line of performance equipment and accessories under the Nike name, including bags, socks, balls for sports, eyewear, watches, digital devices, bats, gloves, protective equipment and other sports equipment.
The company has a Value Grade of F, based on its Value Score of 81, which is considered ultra expensive. Lower scores indicate a more attractive stock for value investors and, thus, a better grade.
Nike’s Value Score ranking is based on several traditional valuation metrics. The company has a score of 30 for shareholder yield, 65 for the price-to-sales (P/S) ratio and 86 for the ratio of enterprise value to earnings before interest, taxes, depreciation and amortization (EBITDA), with the lower the score the better for value. The company has a shareholder yield of 1.1%, a price-to-sales ratio of 3.42 and a 29.9 enterprise-value-to-EBITDA ratio. The price-to-book-value ratio is 10.79, which translates to a score of 95.
The Value Grade is the percentile rank of the average of the percentile ranks of the valuation metrics mentioned above, along with the price-to-free-cash-flow ratio and the price-earnings (P/E) ratio.
A higher-quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the Quality Grade shows that stocks with higher grades, on average, outperformed stocks with lower grades over the period from 1998 through 2019.
Nike has a Quality Grade of A with a score of 98. The A+ Quality Grade is the percentile rank of the average of the percentile ranks of return on assets (ROA), return on invested capital (ROIC), gross profit to assets, buyback yield, change in total liabilities to assets, accruals to assets, Z double prime bankruptcy risk (Z) score and F-Score. The score is variable, meaning it can consider all eight measures or, should any of the eight measures not be valid, the valid remaining measures. To be assigned a Quality Score, though, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.
The company ranks strongly in terms of its gross income to assets and F-Score. Nike has a gross income to assets of 55.7% and an F-Score of 8. The industry median gross income to assets is 29.2% and the median F-Score is 5. The F-Score is a number between 0 and 9 that assesses the strength of a company’s financial position. It considers the profitability, leverage, liquidity and operating efficiency of a company. The only quality metric that ranks below average for Nike is its change in accruals to assets, in the 48th percentile.
Nike reported a positive earnings surprise for fourth-quarter 2022 of 11.8%, and in the prior quarter reported a positive earnings surprise of 22.2%. Over the last month, the consensus earnings estimate for the first quarter of 2023 has decreased from $1.258 to $0.941 per share due to 20 downward revisions. Over the last month, the consensus earnings estimate for full-year 2023 has decreased 18.5% from $4.647 to $3.786 per share, based on 28 downward revisions.
Under Armour Inc. (UAA) develops, markets and distributes performance apparel, footwear and accessories for men, women and children. Its primary business operates in four geographic segments: North America, comprising the U.S. and Canada; Europe, the Middle East and Africa; Asia-Pacific; and Latin America. The North American segment sells apparel, footwear and accessories through its wholesale and direct-to-consumer channels. EMEA sells apparel, footwear and accessories through wholesale customers and independent distributors, along with e-commerce websites as well as brand and factory house stores. Asia-Pacific sells apparel, footwear and accessories products in China, South Korea, Australia, Singapore, Malaysia and Thailand through stores operated by its distribution and wholesale partners.
Under Armour has a Quality Grade of A with a score of 88. The company ranks strongly in terms of its gross income to assets and change in total liabilities to assets. Under Armour has a gross income to assets of 63.7% and a change in total liabilities to assets of –9.4%. The industry median change in total liabilities to assets is 2.9%. The only quality metrics that rank below average for Under Armour are its buyback yield and return on invested capital, in the 37th and 26th percentiles, respectively.
Under Armour has a Value Grade of C based on a score of 49, which is considered average. The company has a score of 33 for the price-to-free-cash-flow ratio and 22 for the price-to-sales ratio. The company has a price-to-free-cash-flow ratio of 10.3 and a price-to-sales ratio of 0.70. A lower price-earnings ratio is considered a better value, and Under Armour’s price-earnings ratio is 61.6% higher than the sector median of 11.2. The enterprise-value-to-EBITDA ratio is 13.5, which translates to a score of 59.
Under Armour reported a negative earnings surprise for first-quarter 2022 of 117.5%, and in the prior quarter reported a positive earnings surprise of 115.4%. Over the last month, the consensus earnings estimate for the second quarter of 2022 has remained the same at $0.260 per share despite one upward and 10 downward revisions. Over the last month, the consensus earnings estimate for full-year 2022 has decreased 14.7% from $0.797 to $0.680 per share, based on two downward revisions.
Under Armour has a Growth Grade of D based on a score of 35. The only growth metric that is above the industry median is the five-year operating cash flow growth rate, at 16.9%. The company has a Momentum Grade of F, with a score of 19. Under Armour has above-average relative price strength in the third- and fourth-most recent quarters, but very poor relative price strength in the first- and second-most recent quarters.
The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.
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