Updated January 18th, 2024 at 18:41 IST

Athleisure boom offers edge to premium retailers

The likes of $59 billion yoga pants maker Lululemon Athletica is on a higher footing than Nike.

Reuters Breakingviews
Karen Kwok
Athleisure | Image:Unsplash

High-rise. The athleisure boom is offering a buffer to a breed of premium brands. Wealthy shoppers hit by inflation have turned their attention from luxury goods to less expensive premium clothing that is suitable for both sports and leisure activities. This has placed the likes of $59 billion yoga pants maker Lululemon Athletica on a higher footing than Nike.

Recent sportswear retailer earnings have exposed two different trends. On the one hand, premium brands like Lululemon and Roger Federer-backed On have raised revenue guidance thanks to shoppers paying full whack for $130 leggings or $200 shoes. On the other, $159 billion Nike expects weaker demand and has pencilled in a mere 1% rise to its full-year revenue. To protect margins, it is cutting $2 billion worth of costs.


Premium brands appear immune to these headwinds. Affluent shoppers in the United Kingdom, for example, spent 79% of their cash on discretionary items last year, according to Mastercard’s data. But instead of splurging on luxury goods like a 2,000 pound Burberry trench coat, wealthy consumers are buying leggings and pricey hoodies that they can wear during hybrid working days. American consumers are also more willing to pay full price for premium athleisure brands than for Nike and Adidas, according to a December dbDIG Athleisure Survey. One reason is that shoppers expect discounts from big sports retailers like JD Sports Fashion and Foot Locker, which are sitting on more than six months of excess Nike and Adidas stock, according to Deutsche Bank analysts.

Diminished demand will stall sales and eat into margins. Analysts polled by LSEG forecast that Nike’s revenue will grow by an average of 4% over the next two years, which is nearly half the expected growth of the global sportswear market, according to Euromonitor International forecasts. Meanwhile, sales at Lululemon and On are expected to grow 12% and 25% respectively in the same period. Lululemon’s EBITDA margin is also expected to hover above 25% in the next five years, compared to Nike’s 15%.


These weakened prospects are reflected in Nike and Adidas’s valuations. Lululemon and On, on average, are trading at a premium of 29 times their expected earnings in 2025, surpassing Nike and Adidas, which are valued on 21 times, LSEG data shows. The latter group’s sponsorships of major sports events like the 2024 Paris Olympics may give them a much-needed boost, but without a longer-term strategy they will struggle to close the valuation gap.


Published January 18th, 2024 at 18:41 IST

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