Wells Fargo downgraded Under Armour to “underperform” while lowering its estimates on Under Armour, Nike, Lululemon and Finish Line due to a slowdown in the athletic cycle.
In a note on Tuesday, Tom Nikic, the Wells Fargo analyst, said that the “athletic apparel/footwear space was one of the strongest sub-sectors in our group coming out of the recession; but after an impressive multi-year growth cycle, we see several areas for concern that are not only likely weighing on the industry, but also have the potential to accelerate.”
He noted that athleticwear grew at over a 7 percent CAGR from 2011 to 2016, from 23 percent of total apparel/footwear to 30 percent. However, while 2016 was another solid growth year for the athleticwear market with a gain of 6 percent, it actually marked its slowest growth since 2010. The slower growth was driven by a 150 basis points deceleration in performance apparel/footwear growth as well as several bankruptcies, most notably Sports Authority but also Sport Chalet, Yoga Smoga and MC Sports.
Athletic trends have further worsened year-to-date with Finish Line, Foot Locker and Dick’s among those comping negative, vendor DTC growth decelerating and additional bankruptcies/door closures. Sneaker retailers are also now underperforming non-athletic shoe stores for the first time since Q4 2011.
Wells Fargo also conducted a survey of 550-plus young male shoppers that showed a highly competitive sneaker market. When asked for the first place they think of to buy sneakers, Foot Locker was the most oft-cited destination, but only 20 percent of total respondents and 30 percent of those who identified themselves as sneaker enthusiasts cited Foot Locker. Only 4 percent of overall respondents cited Finish Line. Forty percent of overall respondents also indicated they would buy like-for-like product on Amazon rather than a traditional sneaker retailer.
On specific brands in the survey, Wells Fargo found Under Armour to be the most frequently cited brand when respondents were asked which brand they had lost interest in. On Nike, the survey found only 10 percent of sneaker enthusiasts indicate they’re aware of its Vapormax platform and find it appealing. That compared to 37 percent for Adidas Boost styles.
“Big picture, the industry has had a remarkable track record of success over the long-term, but with consumers having filled their closets with athleticwear over the past 6-7 years, meaningful distribution issues (bankruptcies, store closures, etc.) and a current ‘lull’ in product innovation, the category appears poised to take a breather for now,” concluded Nikic.
Under Armour’s rating was cut to “underperform” from “market perform” with its price target reduced to $13 from $17. Estimates were reduced on Under Armour, Nike, Lululemon and Finish Line but raised for Foot Locker due solely to quarter-to-date share repurchases revealed in its recently quarterly filing.
Photo courtesy Under Armour
