In this article I 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, Nike and Under Armour?
Athleisure Stocks Recent News
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 many international and regional players that are striving to innovate persistently.
The global athleisure market size was valued at $306.6 billion in 2021 and, according to Grand View Research, is expected to grow at a compound annual growth rate (CAGR) of 8.9% from 2022 to 2030. This would value the market at more than $660 billion by 2030. Combined, North America and Europe cover more than half of all market share in the athleisure segment. 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 subsegments: 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’ desire to mix comfort and style. To combat this, many luxury retailers launched athleisure items such as sneakers, leggings and gym accessories.
The growth of this market is vastly attributed to the coronavirus pandemic and resulting lockdowns. More people working from home means less professional and more comfortable clothing. Now that there is a sizable demand for these products, companies have the opportunity to rapidly increase their market share in athleisure with few signs of the trend slowing down.
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 in order to survive in the already competitive industry.
Grading Athleisure Stocks
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, 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 (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 Lululemon Studio, formerly 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 its fiscal first-quarter 2023 of 15.4%, and in the prior quarter reported a positive earnings surprise of 3.3%. Over the last month, the consensus earnings estimate for the second quarter of 2023 has increased from $2.497 to $2.531 per share due to 12 upward and nine downward revisions. Over the last month, the consensus earnings estimate for the fiscal year ending January 2024 has remained relatively flat, increasing from $11.925 to $11.927 per share, based on 26 upward revisions.
Lululemon has a Momentum Grade of B, based on its Momentum Score of 71. This means that it has strong weighted relative strength over the last four quarters. This score is derived from an above-average relative price strength of 10.5% in the second-most-recent quarter, 0.8% in the third-most-recent quarter and 8.5% in the fourth-most-recent quarter, offset by below-average relative price strength of –5.7% in the most recent quarter. The scores are 54, 87, 58 and 71 sequentially from the most recent quarter. The weighted four-quarter relative price strength is 1.7%, which translates to a score of 71. 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 9, which is considered ultraexpensive. This is derived from a high price-to-free-cash-flow (P/FCF) ratio of 83.4 and a high price-to-book-value (P/B) ratio of 14.77. In addition, Lululemon has a Growth Grade of A, which is considered very strong. This is derived from year-over-year increases in sales and positive cash from operations in each of the last five fiscal years.
Nike (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 and Africa (EMEA); Greater China; and Asia-Pacific and 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 18, which is considered ultraexpensive. Nike’s Value Score ranking is based on several traditional valuation metrics. The company has a rank of 93 for the price-to-book ratio, 69 for the price-to-sales (P/S) ratio and 88 for the ratio of enterprise value to earnings before interest, taxes, depreciation and amortization (Ebitda), with lower scores indicating better value. The company has a shareholder yield of 3.5%, a price-to-sales ratio of 3.31 and an enterprise-value-to-Ebitda ratio of 28.3.
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, shareholder yield 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 90. 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 gross income to assets of 58.2% and an F-Score of 6. The sector median gross income to assets is 30.6% and the median F-Score is 4. 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.
Nike reported a negative earnings surprise for first-quarter 2023 of –1.5%, and in the prior quarter reported a positive earnings surprise of 44.2%. Over the last month, the consensus earnings estimate for the second quarter of 2023 has decreased from $1.037 to $0.735 per share due to 17 downward revisions. Over the last month, the consensus earnings estimate for the fiscal year ending May 2024 has decreased 5.8% from $3.964 to $3.734 per share, based on 27 downward revisions.
Under Armour (UAA) develops, markets and distributes performance apparel, footwear and accessories for adults and children. Its primary business operates in four geographic segments: North America, comprising the U.S. and Canada; Europe, the Middle East and Africa (EMEA); Asia-Pacific; and Latin America. The North American segment sells apparel, footwear and accessories through its wholesale and direct-to-consumer channels. The EMEA segment sells apparel, footwear and accessories through wholesale customers and independent distributors, along with e-commerce websites and brand and factory house stores. The Asia-Pacific segment 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 B with a score of 74. The company ranks strongly in terms of its gross income to assets and buyback yield. Under Armour has gross income to assets of 54.5% and a buyback yield of 5.8%. The sector median gross income to assets is 30.6%.
Under Armour has a Value Grade of B based on a score of 76. The company has a rank of 28 for the price-earnings ratio and a rank of 22 for the price-to-sales ratio. The company currently has negative trailing free cash flow, so its price-to-free-cash-flow ratio is not meaningful. A lower price-earnings ratio is considered a better value, and Under Armour’s price-earnings ratio is 9.6, below the sector median of 15.9. The enterprise-value-to-Ebitda ratio is 9.9, which ranks in the 50th percentile of all stocks.
Under Armour has a Growth Grade of C based on a score of 57. The company has increased its sales in three of the last five years, along with having positive cash from operations in three of the last five years. The company has a five-year average sales growth of 2.6%, which is below the sector median of 6.0%.
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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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