Athletic wear continues to gain market share in the U.S., and companies across the apparel industry are trying to tap into this fast-growing segment.
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In this episode of Industry Focus: Consumer Goods, Motley Fool analysts Vincent Shen and Sarah Priestley turn their attention to athletic wear and one the major driving forces behind this segment: women. Find out which companies are leading the charge, how they are targeting women, and what to watch going forward as tailwinds build for this huge market.
A full transcript follows the video.
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This podcast was recorded on Jan. 17, 2016.
Vincent Shen:Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. I'm your host, Vincent Shen. It is Tuesday, January 17th, and fellow Motley Fool analyst,Sarah Priestley, is in studio with me again this week to talk the consumer and retail sector. How are you, Sarah?
Sarah Priestley: I'm good, thank you. What a great commercial to bring us into our topic.
Shen: Yeah!Actually, very appropriate. Last week, we talked aboutresolutions. Towardsthe end of that show, we talked a little bit aboutsurprising statistics around gymattendance. The numbers are a little bit discouraging, but basically boil down tosomething along the lines of 80% ofpeople who joined a gym in January 2012,according to whatever the study you had found was, they generally quit within five months. There wasapparently an episode of another podcast, Planet Money, where they visited aPlanet Fitnesslocation. The gym had a capacity for 300 people, but they had signed up 6,000 total members --which is insane, by the way. What came out was that half of thePlanet Fitness members did not even ever go to the gyms.
I've certainly done that before, in terms ofholding onto a membershipthinking you'll get better, thinking I'd become more disciplined about going at least a few times a week. Whether or not that panned out,you guys can guess. But, I think, on the flip side, a look on the moreencouraging side,especially for some of the companies we're going to talk about today, is the general trend overall toward fitness. Some people do manage to maintain it on a year-round basis, are very good about getting their workouts in. This has had a big effect on certain parts of the apparel industry. Why don't you kick us off there, Sarah? What are you seeing in terms of the gym attendance and how it's affecting things?
Priestley: The good news is, last week,we ended on a bit of a down note about gym attendance, but actually, theaverage gym membervisited their gym over 100 times last year, which is an all-time high. It'slooking like that trend is set to continue for this year. Gymmembership has grown 18.6% between 2008 and 2014, and the trend continued into 2015, which is when our last fullset of data is for. The other good news,the other good aspect of this, is that it's not just gyms. We focus on gyms and we talk about gyms a lot, but there's a variety of ways forpeople to get involved in fitness activities, and there's more ways than ever before. If youactually look at runners in the U.S., women made up 57% of runners incompetitive races. Globally, actually, female race participation is up 25%, compared to men at 7%. So,obviously, we're seeing that overall, there's an increase in participation, but it's actually swayed much more toward women.
Shen: That gives it away for our maincoverage area for today. It's not just the apparel industry, but within that ...there are a lot of different ways to describe this, athleisurewear, activewear, sports apparel. Within that segment, the importance that women have played in terms of growth for a lot of these companies, and a lot of companies that previously were not involved in activewear launching lines, branching out. We will get to that. But, going further in terms of some of those numbers you mentioned about female participation in sports and things like that,I thought that a good proxy for thismight be with high school sports participation in this country.
Priestley: Absolutely, yeah.
Shen: I think I pulled some of these numbers last yearduring a show that I did with Sean. The idea was, high school sports participation overall is up again for the 27thconsecutive year. That's according to the National Federation of State High School Associations. They do an athletics participation survey,and they actually have data going all the way back to 1971. Some very telling,interesting numbers here. The surprising thing to see is, back in 1971, the first year of this survey, there were approximately four million total participants inhigh school athletics that year, and about 93% were boys,with the remainder obviously being girls. Thirty years later, by 2001, total sports participation was up over 70% from that four million number. But now, the mix is starting to shift. Girls,instead of just making up 7%, they made up 90% of that growth that we saw from 1970. Now, jump forward another 15 years, in 2016,total participation up over another 16% from that 2001 level. Girls growth outpaced that. Since the early 1970s, girls' participation has grown from 7% to over 42%. I think that really speaks to what we're going to talk about today, these longer-term trends shifting in favor of sports over years and decades. Can you give us an idea of what the activewear market overall now looks like?
Priestley: Yeah. Itcan be difficult to measure,because as we were talking about before the show,it depends what people are taking into consideration when they measure activewear. Overall,just to give you context, the U.S. retail apparel industry is about $225 billion, so per capita spending is about $1,000 per person on clothing and everything else. Activewear,as a portion of that segment, isestimated anywhere between $44 billion to $80 billion. I will caveatall of that by saying it depends on what they're taking into consideration. But, really,what we're trying to demonstrate is that it's actuallygrowing to be a huge portion of the overall retail clothing market in the U.S.
Shen: Yeah,absolutely. I thinkwe both ran into the problem of how to identify it -- athleisurewear, activewear --pinning down the numberfor what the total market size is, it really depends on who is running that data, what they include. Some people, I think you mentioned, might not include shoes, for example. Others might not include accessories. But,overall, if you look at it relatively, the thing you'llquickly see is that over time, thisparticular segment within the apparel industry has grown so quickly, and women have been an integral part of that.
Priestley: Absolutely. If you look at activewear sales, over 2015,last complete data set, they grew16%,depending on the definition, but the segment grew. If you look last year, apparel sales in the U.S. grew 2% year over year. Butif you actually took out activewear, the impact that that would have had on the measurement,it would have declined by 2%. So, that shows youjust how much this is juicing the industry. And if you look at women'scontribution to that,that sports apparel is estimated to grow about 5.7% over the next three years, outpacing the 4.3% expected for the rest of the market. So, women are having a considerable impact on the market.
Shen: Absolutely. Whereyou will see this bear out has been in the success of certain companies. Think about Lululemon(NASDAQ: LULU) and how it has risen to prominenceover the past several years, growing in step with this broader market trend. Then, of course, you have Gap. They launched the Athleta chain to serve as a competitor.Urban Outfittershad Without Walls, which they have pretty much shuttered, but again, trying to get their foot in the door. American Eagle, Victoria's Secret. And,of course, that doesn't even includewho you typically think ofin terms of sports apparel, essentiallythe industry leaders, being, of course,Nike(NYSE: NKE),Adidas, Under Armour(NYSE: UA) (NYSE: UAA). Do you feel like there was a watershed moment, orany notable moments in general, or companies that really helped to drive and curate the growth in this segment, and as women poured into sports?
Priestley: Yeah. I really do.I feel as though it's a chicken-and-egg scenario. I think that women's participation in sports was upeven before a lot of the marketing campaigns targeted women. If you look in 2013, Nike saw their women's segment grow 12%, which outpaced that overalltop line growth of 9%. Obviously, interest was there. Butwhat I love is this anecdoteabout McKenna Peterson,who was 12 years old at the time in 2014. She wrote a letter toDick's Sporting Goods. She'dreceived the company's basketball catalog,she was really into basketball.I would urge people to go and look at this letter, because it's a fantasticexample of truth and honesty that only children can really master. She said, "There are no girls in the catalog. Oh wait, sorry, there is a girl in the catalog on page 6, sitting in the stands." So, her outrage fueled this bigsocial media response and market researchers really tried to hone in on this aspect,they sensed that there was something here. TheNew York Yankees actually sellmore women's apparel than men's apparel. So,people started to notice these things. And marketers came back, and they said that the current ads don't appeal to women because they're not real enough. They showedextremely talented, muscle-cladathletes, and women couldn't really identify with that message, and they couldn't really find a space for themselves within the industry.
So, I would say, to me, two marketing campaigns that really signaled a turning point in the industry, if you look mid-2014,Under Armour came out with the I Will What I Want campaign.Kevin Plank called it the most expansive global women's marketing campaign to date, and it really was. The campaign featuredfemale athletestalking about momentsthat they had received negativity in their career. And that really resonated with a lot of women.You had, like, Misty Copelandtalking about a rejection letter that she had received, things like that. 2015, Nike responded, launching its Better for It campaign, which is the largest women's campaign ever to date. It featured inner dialogue of women. So, you had a women stuck behind a row of models, in a spinning class, a runner through a half-marathon, a yogi unsure of what to do, feeling awkward. And this had tremendous success. Their YouTube inner thoughts compilation video actually received 8.5 million views on their channel on YouTube. So, it was a really fantastic response to all of those.
Shen: Yeah. These two campaigns, it seems like they did it the right way,in terms of captivating that interest from that segment. That letter is justreally funny, if you think about it. Now, I can see,I'm sure foreven a company like Dick's Sporting Goods,seeing how that segment is growing for them within their activewear sales, kicking themselves, like, "Weprobably should have noticed this even sooner. We didn't need this 12 year old to tell us that."
Priestley: [laughs] I love the 12 year old blindsiding the industry. Obviously, to some extent,I feel like it's been blown out of proportion. But it really was a turning point. I feel like a lot ofthe marketers are actually responsiblefor some of the insight that we have gainedinto the female segment of the market.
Shen: Absolutely.So,as we often do during the latter half of the show,getting into some of the numbers for the publicly traded companies that are dabbling in this market. Can yougive us some examples of how certain players have benefited from the surge that we've seen with women's activewear in this segment?
Priestley: Sure. Nike's global sales of its women's business has grown 26% between 2013 and 2015. It's up from $4.5 billion to $5.7 billion. They don't actually break out women's contributions, so that's the last time we can see that. But what we do know is that they currently earn around $5 billion annually, but they expect it to contribute 40% of their revenue over the next five years.
Shen: And that's just from what they see as the women's segment.
Priestley: Absolutely. It's a hugecontributing factor anddefinitely an audience they're going to want to court going forward. Kevin Plank, theCEO of Under Armour, said in the company's last earnings call that women's wear is approaching a $1 billion business for the company. Toput that into some context for you, the total apparel sales in 2015 -- that's the clothing and sportswear -- was $2.8 billion for men, women and children. So, you're looking at a huge contribution, again. Andif you look to some of the more pure play, like,Lululemon is much more of a lifestyle brand,that's how we would describe it, they've had 20% growth in sales over the last five years. Reallyphenomenalsales performance from thesecompanies that are concentratedmostly on the female market.
Shen: But, at the same time, I think the growthnumbers are incredible,there's no doubt about that overall. Thecontribution you described that this segment has had,in the growth of leisure wear,especially with women, youcan't deny that. But it has definitely drawn outa lot of competition, too. Wementioned some of thelifestyle brands or more traditional apparelretailers who weren't really in activeweargetting into it, launching their own lines, orexperimenting. A lot of smaller start up style names. You even have something like aCrossFit or aSoulCycle getting into their own lines of apparel. It is a ton of competition. So, ithas not necessarily been all good news, I guess, forsome of these companies, at least.
Priestley: Absolutely not. Whenever you get a situation like this, it's always going to have the effect of the dreaded commoditization term being applied to it. In this case, I will use some statistics for yoga pants or leggings or tights, which are kind of a barometer for the female market. They're by far the biggest segment within that market. Growth is slowing. They had 6% decline in unit sales last year. The average selling price is down. This is the key issue, that margins are down for these companies as well. If you look, theaverage selling price for tights was down 9% year-over-year in 2016. That trend isset to continue into this first quarter of 2017. So,investors will want to watch that figure quite closely. If you lookmore specifically, margins were down at Nike. They're gross margin was down 1.4% year-over-year for their last quarter.I will caveat that, again, by saying that they claimed in their earnings call that they have higher selling prices, but they wereoffset by unfavorable foreign exchange rates and higher product costs, which could well be the case.
Under Armour, very similarly, was down 1.3% year-over-year in their last quarter. They're suggesting that this reflects the timing of theliquidation ofSports Authority. I think, if youlook at the overall market performance ofUnder Armour, Under Armour A shares are down 40% in 2016. A lot of this was around concerns of, can they compete with Nike? But a big impact of that is that liquidation issues. So, they had to, obviously, put a lot of promotions on to get rid of a lot of the stuff that they had that was going to go through Sports Authority. So,undoubtedly, that had an effect, and we should bear that in mind. But, definitely, you've touched on a couple already, it really is every man and his dog is now in the athletic wear industry. [laughs] That's my dad's favorite saying, by the way.
Wal-Mart is actually the leading sports goods and footwear apparel retailer in the U.S. if you look at it on a value scale. Online, you have Kate Hudson'sFabletics,Net-a-Porter has launched Net-a-Sporter. As you touched on, you have gyms launching their own lines.Amazonhas an announced that they want to enter the market. So,it's a completely saturated market at the moment. AndI think the way we're going to see that shake out is, there will be some leveling off of the more fashion-focusedH&M,Wal-Marts,Target, there will be some leveling off, decreasing, of that market. It's down to the pure play, the true athletic retailers, to carve a segment out for themselves.
Shen: Sure.I think using the legging sales as a proxy for where thissegment is going and what companies might see withwomen's sports apparel makes a lot of sense. Thatseems to be the main thing I pullout of the laundry most days in the hamper with my wife,I hope she doesn't kill me for saying that. I can definitely see that. It'sdefinitely the kind of thing that can be commoditized very easily. You mentioned some of these other stores. Even higher-end names,if you think about aLouis Vuitton, and aBeyonce, for example, coming out with their own athleisure lines, andUnder Armour taking it from the more everyman athlete level, they've taken athleisure upscale, even, with the launch of a new spinoff premium line of athletic wear that's more fashion-focused. What do you think, besidessome of these bigger companies jumping in and making things more competitive, to smaller shops opening up, as well. How do you think some of the main industry leaders like Lululemon or Nike or Under Armour can do to make sure they stay ahead of the pack? Is there something that you see in the next year or five years that's going to allow them to set themselves apart? Or just keep tapping into what is ultimately still a long-term trend that's growing in their favor?
Priestley: Absolutely. And you're right, it is a long-term trend. And I think I'll circle back to something that you mentioned at the start, when you were talking about high school sports participation in girls. That has been proven that if you're involved in sports at a young age, you're likely to be focused on sports for your whole life. That's a crucially important aspect of all of this. It means that the addressable market is increasing every year with more focus on girls. I will say, I think what these brands really need to do is focus on the female segment separately to the male segment. I think it's obviously understood now that certain things that appeal to the male segment of the market don't appeal to the female segment. It has been proven again and again, if you look at Lululemon, who exclusively targeted women, was much more of a lifestyle brand, much more of an all-encompassing concept that women could buy into, they've had a rough road, but they've been treated favorably. If you look, 2016, their share price was up 16%. Their gross margin actually increased 4.2% in 2016. This wasprimarily due to being able to maintainand improve that average retail price. So,you can see that the companies who areexclusively, almost, focusing on the femalesegments are being rewarded the highest. AndI think they need to understand thatwomen, especially millennials,connect best with the authentic stories. So,I think we're going to see more marketing campaigns such as the Better for It and I Will What I Want campaign, and we'regoing to see more focus on the female market.
Shen: Yeah. Andit makes sense, too, that as this segment has proven itselfto be able to deliver such consistent growth, the profits that we've seen, that these companies willnaturally want to separate their effortsa little bit more clearly, knowing that, "OK, we can't just push out these athletic wear or focusedmarketing campaigns or promotions or whatever it may be that are verytraditional and geared toward men,because this other side of it is so lucrative right now, and women can be an evenpotentially bigger part of it." Last question I have for you -- we've been very U.S. focused,I'm curious, based on your experience,I think I asked you this before, back at home in the U.K.,is it as common to see people walking around in their yoga class leggings or whatever? Back at school, oncollege campuses here,I think it is an everyday, incredibly common thing. But, whatopportunity do you think this has tobecome an everyday part of your wardrobe abroad,not only in Europe, but also in Asian markets and elsewhere?
Priestley: I think the Asian markets are huge growth opportunity. Massive. Andfrom some of the articles I was reading, actually, like theMorgan Stanley report, they suggest that the China market might be underestimating the U.S. market and vice versa. So,clearly, there's huge potential in both.I would say, traditionally, back home where I'm from in the U.K.,people would have been slightly more conservatively averse to wearing leggings all the time. That has completely changed now. Andthey are just as popular as they are here. The big selling point in the U.S. is,with the rise of a lot of start-ups, more casual attire is acceptable in work and other situations. Maybe not so much the same back home. But, Nikeactually opened their first female-only store in London. So, it shows you that theyperceive there is an opportunity there.
Shen: Yeah. That'svery interesting,what you mentioned with the start-ups. I think it takes a long time,sometimes even decades, for a culture change to happen. But once it happens, you mentioned Nike just opened the store, theopportunity is there. I think that, especially in Asia, that will definitely besomething we have to focus in another show, theopportunity of this segmentfor both men and women abroad. Otherwise, anything else you want to close out with?
Priestley: No,I don't think so.I think this is definitely something that should formpart of the investment thesis ofinvestors looking to get into this space.I'm not necessarily for the big companies, the Targets and H&Ms and people like that, but definitely for Nike and Under Armour, it's going to become an increasingly important part of their business.
Shen: Great. Thanks a lot, Sarah! I appreciate it!
Priestley: Thank you!
Shen: Thatwraps up our discussion for today. You can reach out to usand the rest of the Industry Focus crew via Twitter @MFIndustryFocus, orsend us any questions via email to firstname.lastname@example.org. Don'tforget to check outwww.fool.com/podcastsfor other awesome shows. Peopleon the program may owncompanies discussed on the show, andThe Motley Fool may have formal recommendations for or against those stocks mentioned,so don't buy or sell anything based solely on what you hear during this program. Thanks for listening and Fool on!
Sarah Priestley owns shares of Under Armour (C Shares). Vincent Shen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com, Lululemon Athletica, Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool recommends Planet Fitness. The Motley Fool has a disclosure policy.