Why Nike and Lululemon Plummeted? Opportunities in Sports Apparel?

In 2021, Nike's stock price hit a historic high of $179.1 but has since been in a prolonged slump, falling nearly 60% from its peak.

On June 28th, Nike announced its performance for FY2024, with revenue and profit increasing by 0.3% and 12%, respectively, which was below market expectations. At the same time, Nike lowered its performance guidance for FY2025, with an expected decline in full-year revenue by mid-single digits, resulting in the stock plummeting nearly 20%.

In recent years, the global economic environment has become increasingly complex and volatile, with a general decline in consumer purchasing power and declining market demand. This trend has directly affected Nike's sales performance, leading to increased inventory pressure. At the same time, as consumers become more health and fitness-conscious, the sports shoe and clothing market is experiencing overall growth, but competition is also becoming increasingly fierce.

New brands such as ON, Hoka, and Lululemon have quickly gained exposure through social media platforms such as TikTok and Instagram, attracting different groups of people through differentiated positioning and driving rapid growth in brand size. While Nike has a strong brand influence and technological accumulation, its reaction speed and innovation capabilities are relatively lacking in response to rapidly changing market demands, leading consumers to perceive the brand as old and boring.

In addition, Nike's channel transformation is also facing difficulties. Since 2020, Nike has been implementing a DTC strategy, selling products directly to customers to bypass third-party retailers and wholesalers in order to be closer to consumers. Nike has cut ties with well-known wholesale retailers such as Urban Outfitters, Dillard's, and Zappos. This approach has reduced costs and expenses, bringing greater profit margins, but it has also brought troubles such as returns and self-owned inventory to Nike. Meanwhile, these wholesale channels have quickly been occupied by emerging brands like ON.

The upcoming Olympics at the end of July will be an important promotional opportunity for Nike, as the brand plans to launch a large number of new products during the event. Nike is set to launch a new series of Nike Blueprint and Nike Pegasus running shoes, with Air technology as the main focus.

However, the Olympics can only bring short-term attention to the brand. To address Nike's long-term challenges, the company needs to focus on its products. To maintain its leading position in the fiercely competitive market, Nike needs to provide products that better meet market demands through continuous innovation, build a brand with market-recognized values, improve supply chain management, and reduce inventory backlog.

Lululemon's stock price rose by over 60% in 2023, but has fallen by over 40% since 2024 and is now close to its low point in the past two years.

Between 2020 and 2023, Lululemon was the fastest-growing brand in the US sportswear market, with its market share increasing from 3.9% to 5.4%. To continue its growth, Lululemon has adopted a diversified strategy, expanding into men's wear, casual wear, and accessories, rather than focusing solely on yoga and women's wear. This has led to a revenue CAGR of 24.7% over the past five years, making Lululemon a billion-dollar sports brand.

North America is Lululemon's core market, accounting for 79% of its revenue, but the growth rate in the American market has slowed significantly. The revenue growth rate in the Americas region in 2023 was only 12% YoY, compared to 29% in 2022.

As growth slows, the market is beginning to worry about Lululemon's development prospects.

1) Cheaper new brands are emerging in the yoga pants market, and Lululemon's product advantages are being surpassed. Many new yoga pants brands have emerged, including CRZ Yoga, VFU, GIGT, and others, whose prices are usually only 30%-60% of Lululemon's. Consumer surveys show that consumers do not perceive significant difference between these low-priced products and Lululemon's products. Faced with this challenge, Lululemon, which rarely discounted its products in the past, has frequently launched various promotional activities this year.

2) Entering new markets such as men's wear and footwear faces more intense competition. Lululemon's feminine brand label is deeply ingrained in people's minds, and male consumers are not as aware of the brand. The revenue growth rate of the men's wear business in 2023 was only 15%, accounting for less than 15% of total revenue. In the footwear business, Lululemon's competitors include giants such as Nike and Adidas, as well as strong emerging brands such as ON and Hoka.

Jefferies lowered its target price for Lululemon from $240 to $220 on July 10th. The analyst noticed that Lululemon's offline stores have offered significant discounts on various sizes and product categories, leading to the belief that "performance has peaked and competition is rising." In addition, the analyst cited the example of Coach's impact from Michael Kors' rapid rise, believing that Lululemon may face similar situations and a re-evaluation of its value by the market.

ON and Hoka, owned by Deckers, are the new forces in the running shoe market and have grown rapidly in the past three years. ON's North American market share has increased from 0.6% to 2.4%, while Hoka has increased from 0.9% to 2.4%. The rapid increase in market share is mainly due to the following reasons:

1) Innovative products with precise positioning. ON provides a new running experience with its unique CloudTec technology, which offers excellent shock absorption and rebound. Hoka focuses on high-performance running shoes, known for their thick soles, meeting the needs of professional runners and sports enthusiasts.

2) Seizing changes in consumer trends. Hoka's off-road running shoes meet the needs of consumers under the trend of outdoor sports, while ON promotes sustainable concepts, which align with consumers' growing concerns for the environment.

Will the Greater China region's performance growth continue? In the latest financial quarter, Greater China has been the revenue growth engine. Nike, Lululemon, and ON reported revenue growth rates of 7%, 40%, and 68.5%, respectively, in the Greater China region, accounting for revenue shares of 14.2%, 15.8%, and 10.3% of their total revenue.

Inventory cycle reaches inflection point. The current inventory cycle has reached the end of destocking. The inventory-to-sales ratio of wholesale inventory in US is approaching historical normal levels, and the industry is in a transition phase from destocking to replenishing. Historically, the replenishment cycle for US retailers has lasted 4-6 quarters.

New product release cycle begins. Nike and Adidas have released few new technologies or influential products since 2019, resulting in a series of problems such as brand aging, sluggish sales, and slow inventory turnover. With the arrival of the Olympics, the brands are expected to use this as a starting point to launch a new round of technological upgrades.

by moomoo News  Olivia