Which Workout Gear Manufacturers Are Good Investments?
Jaiyant is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It is no secret that people are more exercise-conscious these days. Whether they are actually getting active or not is something that is debatable, but more people invest in gym gear, athletic clothing and yoga accessories because the amount of media attention given to the travails of being inactive is immense. Consequently, we see more people registering for gym, yoga and fitness classes.
Growing registrations at gyms and health clubs ensure increased apparel sales
Anybody who has signed up for gym classes knows that we focus on purchasing clothes that make us look good while working out. Clothing companies that manufacture sports goods, athletic wear, and active wear, will monetize the increasing fitness awareness among people.
Fashion-conscious people have almost always chosen Lululemon Athletica (NASDAQ: LULU) for yoga classes and Nike (NYSE: NKE) for gym classes. Another clothing company that interests me is Gildan Activewear (NYSE: GIL), which focuses on casual clothing but has sports and athletic lines as well. In this article, I shall discuss these three companies as investment options.
Yoga is in and so is Lululemon
Yoga is no more a trendy fad, but a lifestyle choice that many health-conscious people are making. With yoga classes and workshops springing up in every neighborhood, the demand for yoga gear is only going to increase. That is where Lululemon comes into the picture. Lululemon sells premium yoga and exercise gear. Its workout gear looks great and it motivates people to get more active.
Christine Day, who resigned as CEO of Lululemon citing personal reasons, said in a quote that is already famous on the Internet: "I am not the culture of Lululemon. Everyone is the culture of Lululemon." The company’s shares fell 18% after she announced her resignation, but it has already shown signs of recovery, with the share price increasing by 3.9% as I write this piece.
The problems for the company arose when it was forced to recall its overly sheer yoga pants that cost $100 and were deemed to be poor in quality and very revealing. The $17.5 million inventory write-down is probably behind the company, as Day noted.
Going forward, Lululemon has planned store openings in Europe and Asia in 2014. The company already has stores in consumer-driven markets such as Hong Kong, Berlin, London and Singapore. It plans to have 300 stores in the U.S. alone. There are also plans to start standalone stores for men by 2016.
Though Day's resignation came as a shock to the investment community, I see Lululemon learning lessons from its yoga pants fiasco and instead using it as an opportunity to improve its products, open stores targeted at men, and expand in Asia and Europe in the next three years. With a market cap of $10 billion and a profit margin of nearly 20%, it is a very large and profitable company that could prove to be a smart long-term investment choice.
Nike’s brand image makes it an industry leader
Nike has a diverse clientèle that remain surprisingly faithful to the brand. It manages to attract everyone from older adults to teenagers who purchase its sneakers, accessories and apparel not only to hit the gym or play sports, but also as casual wear. What Nike offers to investors is its appeal to every demographic. Though Nike recently fell by 1.4%, it will prove to be a great long-term investment option. The company's international brand image works in its favor and will continue to drive sales and revenue.
A reason for Nike's popularity among different cross-sections of society is its inclusiveness. For instance, Nike launched a special line of its popular Free Run 5.0 shoes in order to support the LGBT Sports Coalition. The #BeTrue Free Run 5.0 shoes are aimed at ending anti-LGBT discrimination in athletics by 2016. The company has consistently been ranked one of the most anti-discriminatory corporations, and that quality can drive up sales. Indeed, the #BeFree sneakers may not actually increase Nike's overall revenue significantly, but they will certainly establish Nike as one of the most gay-friendly companies in the world. And that is something very positive to look at.
Nike trades at $62 and has a market cap of $55 billion. With a profit margin of 9.2% and an operating margin of 12%, it is one of the more profitable apparel companies around. With a return on assets of 12.6% and a return on equity of 22%, Nike is managed very effectively. The company has an expected PEG ratio of 2.1 for the next five years, which puts the company in the slightly overvalued category. The company’s fourth quarter results will be announced on June 27.
Gildan Activewear is affordable and promising
Gildan Activewear, the Canadian apparel company, is one of the most promising apparel stocks at the moment. Gildan's strength lies in selling classic designs that do not run the risk of creating fashion faux-pas like Lululemon's too-sheer yoga pants. The company's timeless products appeal to all age groups and is popular with families. The company plans to penetrate the U.S. retail market further and enhance its image with global consumer brands as a reliable supply chain partner.
Gildan purchased Anvil Holdings, a supplier of premium T-shirts for the print-wear market, for $88 million in 2012. After the acquisition of Anvil, Gildan reported 27.4% growth in sales in the second quarter results of 2013. Though Gildan Activewear does not have the loyal brand following that Lululemon and Nike enjoy, it is the industry leader in print-wear.
Gildan Activewear trades at $40 and has a market cap of almost $5 billion, making it one of the largest apparel stocks around. With a profit margin of 13% and an operating margin of 14.4%, Gildan is profitable and attractive. Its price-to-sales ratio of 2.4 is slightly disappointing but Nike's price-to-sales ratio stands 2.2, which is only slightly better. Gildan Activewear has a five-year expected PEG ratio of 1.5 and is slightly overvalued. However, its increased focus on expanding its US operations and acting as an excellent supply chain partner may help it to become more attractive to investors.
The future for clothing companies that deal with active and sports gear is promising. As people become increasingly health conscious, we will see more people joining gyms and yoga classes. That directly correlates with increased apparel sales for companies like Lululemon, Nike and Gildan Activewear. Certainly, these stocks are good long-term investment options.
Lululemon has the potential to grow its sales by 10 times if it can penetrate its other markets like it has in Canada, but the competitive landscape is starting to increase. Can Lululemon fight off larger retailers and ultimately deliver huge profits for savvy investors? The Motley Fool answers these questions and more in its most in-depth Lululemon research available. Thousands have already claimed their own premium ticker coverage; gain instant access to your own by clicking here now.
Jaiyant Cavale has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica and Nike. The Motley Fool owns shares of Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!