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.
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.
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 about resolutions. Towards the end of that show, we talked a little bit about surprising statistics around gym attendance. The numbers are a little bit discouraging, but basically boil down to something along the lines of 80% of people who joined a gym in January 2012, according to whatever the study you had found was, they generally quit within five months. There was apparently an episode of another podcast, Planet Money, where they visited a Planet Fitness location. 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 the Planet Fitness members did not even ever go to the gyms.
I've certainly done that before, in terms of holding onto a membership thinking 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 more encouraging 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, the average gym member visited their gym over 100 times last year, which is an all-time high. It's looking like that trend is set to continue for this year. Gym membership has grown 18.6% between 2008 and 2014, and the trend continued into 2015, which is when our last full set 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 for people to get involved in fitness activities, and there's more ways than ever before. If you actually look at runners in the U.S., women made up 57% of runners in competitive 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 main coverage 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 this might be with high school sports participation in this country.
Priestley: Absolutely, yeah.
Shen: I think I pulled some of these numbers last year during a show that I did with Sean. The idea was, high school sports participation overall is up again for the 27th consecutive 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 in high 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. It can 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, is estimated anywhere between $44 billion to $80 billion. I will caveat all 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 actually growing to be a huge portion of the overall retail clothing market in the U.S.
Shen: Yeah, absolutely. I think we both ran into the problem of how to identify it -- athleisurewear, activewear -- pinning down the number for 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'll quickly see is that over time, this particular 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 grew 16%, depending on the definition, but the segment grew. If you look last year, apparel sales in the U.S. grew 2% year over year. But if you actually took out activewear, the impact that that would have had on the measurement, it would have declined by 2%. So, that shows you just how much this is juicing the industry. And if you look at women's contribution 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. Where you will see this bear out has been in the success of certain companies. Think about Lululemon (NASDAQ:LULU) and how it has risen to prominence over 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 Outfitters had 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 include who you typically think of in terms of sports apparel, essentially the industry leaders, being, of course, Nike (NYSE:NKE), Adidas, Under Armour (NYSE:UA) (NYSE:UAA). Do you feel like there was a watershed moment, or any 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 up even 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 overall top line growth of 9%. Obviously, interest was there. But what I love is this anecdote about McKenna Peterson, who was 12 years old at the time in 2014. She wrote a letter to Dick's Sporting Goods. She'd received 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 fantastic example 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 big social media response and market researchers really tried to hone in on this aspect, they sensed that there was something here. The New York Yankees actually sell more 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 showed extremely talented, muscle-clad athletes, 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 featured female athletes talking about moments that they had received negativity in their career. And that really resonated with a lot of women. You had, like, Misty Copeland talking 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 just really funny, if you think about it. Now, I can see, I'm sure for even a company like Dick's Sporting Goods, seeing how that segment is growing for them within their activewear sales, kicking themselves, like, "We probably 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 of the marketers are actually responsible for some of the insight that we have gained into 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 you give 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 huge contributing factor and definitely an audience they're going to want to court going forward. Kevin Plank, the CEO of Under Armour, said in the company's last earnings call that women's wear is approaching a $1 billion business for the company. To put 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. And if 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. Really phenomenal sales performance from these companies that are concentrated mostly on the female market.
Shen: But, at the same time, I think the growth numbers are incredible, there's no doubt about that overall. The contribution you described that this segment has had, in the growth of leisure wear, especially with women, you can't deny that. But it has definitely drawn out a lot of competition, too. We mentioned some of the lifestyle brands or more traditional apparel retailers who weren't really in activewear getting into it, launching their own lines, or experimenting. A lot of smaller start up style names. You even have something like a CrossFit or a SoulCycle getting into their own lines of apparel. It is a ton of competition. So, it has not necessarily been all good news, I guess, for some 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, the average selling price for tights was down 9% year-over-year in 2016. That trend is set to continue into this first quarter of 2017. So, investors will want to watch that figure quite closely. If you look more 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 were offset 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 the liquidation of Sports Authority. I think, if you look at the overall market performance of Under 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's Fabletics, Net-a-Porter has launched Net-a-Sporter. As you touched on, you have gyms launching their own lines. Amazon has an announced that they want to enter the market. So, it's a completely saturated market at the moment. And I think the way we're going to see that shake out is, there will be some leveling off of the more fashion-focused H&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 this segment is going and what companies might see with women's sports apparel makes a lot of sense. That seems to be the main thing I pull out 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's definitely 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 a Louis Vuitton, and a Beyonce, for example, coming out with their own athleisure lines, and Under 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, besides some 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 was primarily due to being able to maintain and improve that average retail price. So, you can see that the companies who are exclusively, almost, focusing on the female segments are being rewarded the highest. And I think they need to understand that women, 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're going to see more focus on the female market.
Shen: Yeah. And it makes sense, too, that as this segment has proven itself to be able to deliver such consistent growth, the profits that we've seen, that these companies will naturally want to separate their efforts a little bit more clearly, knowing that, "OK, we can't just push out these athletic wear or focused marketing campaigns or promotions or whatever it may be that are very traditional and geared toward men, because this other side of it is so lucrative right now, and women can be an even potentially 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, on college campuses here, I think it is an everyday, incredibly common thing. But, what opportunity do you think this has to become 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. And from some of the articles I was reading, actually, like the Morgan 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. And they 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, Nike actually opened their first female-only store in London. So, it shows you that they perceive there is an opportunity there.
Shen: Yeah. That's very 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, the opportunity is there. I think that, especially in Asia, that will definitely be something we have to focus in another show, the opportunity of this segment for 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 form part of the investment thesis of investors 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: That wraps up our discussion for today. You can reach out to us and the rest of the Industry Focus crew via Twitter @MFIndustryFocus, or send us any questions via email to email@example.com. Don't forget to check out www.fool.com/podcasts for other awesome shows. People on the program may own companies discussed on the show, and The 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!