Oppenheimer and Co., Inc. raised its rating on Dick’s Sporting Goods to “Outperform” and reiterated “Outperform” recommendations on Nike, Lululemon, Academy Sports, and Under Armour on healthy fundamentals for the overall industry.
“We look upon fundamental underpinnings of athleisure and sporting good retail as solid, if not strengthening, and view investor sentiment toward the spaces as generally overly pessimistic,” wrote Brian Nagel, Oppenheimer’s lead analyst in the space, shown below.
Nagel raised his price target on Academy while downwardly readjusting his price targets on Nike, Lululemon and Under Armour due to recent stock market pressures; however, he believes the industry’s stocks have been oversold.
In particular, Nagel considers Nike’s discussions using aggressive promotions to work down elevated inventories acted “to further unnerve already recession-wary investors. We believe that markets are too pessimistically interpreting trends at NKE.
The favorable industry drivers include potential shifts in “consumer behaviors and consumption patterns developed through the elongated COVID-19 pandemic to persist, rendering spending within broader sporting goods structurally elevated,” he continued.
Improved digital capabilities are also enabling major brands to reach a broader customer base. Another factor supporting the industry’s fundaments is the rationalization of wholesale distribution by vendors, leading to better showcasing products in the marketplace and a reduced likelihood of promotions.
Finally, on the supply side, the flow and the cost of moving products should improve as supply chain constraints and shipping fees appear to moderate.
Said Nagel, “Inherent in our now more constructive outlook for athleisure and sporting goods retail is our view that any Fed-induced economic downturn in the U.S. should prove short-lived and shallow. That said, we recognize nearer-term risks and are positioning our positive stock calls, within the sectors, as primarily intermediate- to longer-term in nature.”
Among stocks under Oppenheimer’s coverage, Nagel reiterated its “Outperform” rating on Nike while lowering its price target to $135 from $195 to adjust to the deteriorating stock market in recent quarters. Nagel noted that the revised price target continues to suggest a nearly 50 percent upside from current levels.
Nagel wrote, “While we recognize prospects for continued macro deterioration and impacts upon sales and profit trends at NKE, we largely view investor sentiment towards NKE as now too pessimistic. Data suggest that underlying demand at NKE is holding up well and potentially strengthening.”
Nagel further said Nike should benefit from easing supply chain constraints and expanding digital capabilities supporting product development turnaround and customer engagement. Nagel wrote, “In our view, following brief inventory resets, NKE and others will prove much better-positioned to develop and deliver products, to even better satiate still-heathy underlying consumer demand.”
On Thursday, shares of Nike closed at $86.87, down $1.70, after starting the year at $166.67.
Oppenheimer lifted its rating on Dick’s to “Outperform” from “Perform” while establishing a 12-to-18-month price target of $138. Nagel wrote, “In our view, a now better-positioned and more strategically merchandised Dick’s Sporting Goods is likely to continue to capitalize well upon positive, post-pandemic shifts in consumer demand and stepped-up competitive fallout within sporting goods retail. At current levels, DKS trades at just 12x-14x our assumed recession case earnings for the chain.”
On Thursday, shares of Dick’s closed at $108.52, off 59 cents, after starting the year at $114.99.
Oppenheimer reiterated its “Outperform” rating on Lululemon while re-adjusting its price target to $393 from $440 due to recent equity market pressures. Said Nagel, “Recent results from LULU have proven nothing short of stellar. We see the company remaining in the still-early stages of growth in legacy North American markets as it continues to expand aggressively overseas. Superior product innovation and brand positioning should allow LULU to manage any nearer-term promotional and/or macro-related headwinds well. LULU represents our preferred investment play across athleisure and sporting goods retail.”
On Thursday, shares of Lululemon closed at $293.13, down $3.74, after starting the year at $391.45.
Oppenheimer raised its price target on Academy Sports to $75 from $60 while keeping its “Outperform” rating. Nagel said, “Under the guidance of new senior leadership, ASO has improved operation controls and established the chain as the value player within the sector. ASO is now in the early stages of restarting new unit expansion. At current levels, ASO trades at just 8.1x our estimated FY23 (Jan. 2024) EPS of $5.60.”
On Thursday, shares of Academy Sports closed at $42.25, declining $1.12. The stock began the year at $85.85.
Oppenheimer maintained its “Outperform” rating on Under Armour while slashing its price target to $15 from $34 to reflect the stock’s recent weakness. Nagel said the rating is “highly speculative” as the brand is still seeking a new CEO who is expected to be charged with accelerating growth. Nagel wrote, “Per various metrics, the Under Armour brand remains relevant and compelling to core consumers, suggesting a near- and longer-term opportunity for management to continue to expand the reach of UAA with new, innovative products. Near-term challenges persist. That said, over time, we remain optimistic that improving earnings power of the firm should refocus investors on fundamentals and precipitate a flow of funds back into shares.”
On Thursday, shares of Under Armour closed at $6.62, losing 30 cents on the day. The stock began the year at $21.19.
Photos courtesy Lululemon, Oppenheimer & Co., Inc.
