3 Sports Companies With a Bright Future

Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Sports players and their styles of dress have a great impact on consumers, which drives the growth of the sports apparel industry. This growth is also fueled by the increasing participation of consumers in sports and fitness activities. The global sports apparel industry is expected to reach around $178 billion in 2019, growing at a CAGR of 4% from 2012. In this article, I have selected three sports apparel companies, Lululemon Athletica (NASDAQ: LULU), Nike (NYSE: NKE), and Under Armour (NYSE: UA), which are taking different strategic moves to benefit investors. Lululemon and Under Armour are expanding globally, and Nike is taking advantage of its global presence. These are the fundamental factors that will drive their businesses in the future.

A sports brand expanding its footprint

Lululemon has adopted the strategy of pre-seeding for expanding into global markets. Pre-seeding is an activity in which a company scans the market to examine its potential before opening stores there. E-commerce is an essential tool that helps companies in their pre-seeding activities.

Lululemon is well placed to carry out its expansion in the European and Asian markets. The company’s e-commerce website allows it to access 27 markets in Hong Kong, Singapore, the U.K., and Europe. Lululemon had great success with its pre-seeding activities in the U.S. in 2009. It has started pre-seeding activities in Europe and Asia, and plans to have 10-15 showrooms in these markets in 2013. These expansion activities will help Lululemon to generate $100 million revenue each in Europe and Asia in 2013.

Lululemon currently has 135 stores in the U.S. The company is expected to add about 33 stores in the U.S. in 2013. Store productivity is measured as average annual sales per square foot of store area. At present, the store productivity for Lululemon in the U.S. is $668 per square foot. This is expected to increase to $770 per square foot by 2013, enhanced by the opening of new stores. Also, the company has far fewer numbers of stores in the U.S. as compared to its competitors. It has the potential to expand to 300 stores in the country in the next five years. This is more than double the number of stores Lululemon has in the U.S. at present.

A multinational seeking organic growth

The North American and European markets contribute 39% and 29% of Nike's apparel sales, respectively. Greater China and the emerging markets have a comparatively lesser share, with 14% and 13%, respectively. The company is putting its efforts toward improving its market share in Chinese markets. The modern Chinese consumer has become more sophisticated and wants custom-made, innovative products.

At the end of 2013, the company had orders worth $12.1 billion scheduled for delivery globally from June 2013 to November 2013. This is an increase of 8% over the same period last year. Nike occupied 4.67% of the global sports apparel market share, valued at $135 billion, in 2012. It is expected that Nike will have 5.7% market share in the next year.

The company is well positioned to accelerate its $8 billion share buyback program, which it began in the third-quarter of the 2013 fiscal year. Nike had $3.34 billion in cash balance at the end of fiscal 2013. The expected free cash flow for the years 2014 and 2015 is $1.96 billion and $2.43 billion, respectively. Nike's high free cash flow is mainly because the company operates on a capital-light model. Companies working on this model have a low investment in capital equipment, which allows them to be cash-rich. The amount of cash and the free cash flow is enough to help Nike fund its share purchase program at an accelerated rate without using any financial leverage. As a result, the share buyback program, which is scheduled to be completed in four years, could be completed in only three years. The accelerated share buyback would help the company increase its EPS.

On the expansion mode

Under Armour has a detailed three-year plan, through which it intends to reach $4 billion in revenue by 2016, nearly double its expected revenue in 2013. The company plans to do this primarily through global expansion. In 2012, only 6% of its $1.83 billion revenue came from international operations. Realizing the great potential that lies in the global markets, Under Armour hired Charlie Maurath, who previously helped Adidas expand into Latin America.

Under Armour plans to open 10 additional international offices in 2013. As a result, the company will have more offices abroad than it has in the U.S. It also plans to open four subsidiaries in 2014, including one in Brazil. This subsidiary will primarily target the potential that exists in Brazil due to the 2016 Summer Olympic Games in Rio de Janerio. As a result of these expansion initiatives, it is expected that revenue from international operations will grow at a CAGR of 45% through 2016, reaching $480 million in 2016.

The Armour39 digital performance monitor is a gadget designed by Under Armour that measures willpower. This gadget, when strapped around a person’s chest, measures heart rate and calories burned, and produces a ‘willpower’ score. Under Armour launched this product in the market in March 2013, and also created an online campaign promoting this product. This online campaign, because of the benefit of the product, drove one million additional site visits in the first-quarter of 2013. This online promotion was done to increase traffic and conversion on the company’s e-commerce website. Under Armour’s e-commerce model is based on driving traffic to its website. Once a consumer visits the website, he is persuaded to make a purchase and convinced to make a repeat purchase. The company’s e-commerce sale was $165 million in 2012, 9% of its $1.835 billion revenue. E-commerce sales are expected to increase to $222.5 million in 2013, a growth of 35% year-over-year.

Conclusion

Lululemon has growth potential in Europe and Asia. It is also expanding its business in the U.S. to improve its store productivity.

Nike is leveraging its presence in the global markets. Nike is also well-positioned to accelerate its share repurchase program.

Under Armour’s global expansion plans will help the company to double its international revenue by the year 2016. Its e-commerce business is expected to grow by 35% this year because of the increased traffic on its e-commerce website.

All three of these stocks are a "buy."

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Shweta Dubey has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica, Nike, and Under Armour. The Motley Fool owns shares of Nike and Under Armour. 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!

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