It looked for a brief moment like office wear was making a comeback and casual wear would go to the back of your closet. But although some people are wearing suits to the office again, athleisure isn't going anywhere. Actually, it's going everywhere, beyond the gym. Many clothing companies are joining the fray, but some are making a bigger splash.
Lululemon Athletica (LULU 1.31%) was one of the first ones on the scene and is dominating the premium activewear industry. On Holding (ONON 2.66%), however, is making a formidable challenge as a top premium brand. Let's see which one could win in 2024.
The case for Lululemon: High brand awareness
Lululemon helped create the athleisure trend through its popular yoga pants and now full collection of apparel, accessories, and most recently, women's footwear. It's taken the fitness community by storm and engaged fans with content, classes, and branding that says "We get you."
It also markets clothing that's highly unseasonal, which means it doesn't have to mark down prices at the end of a season. Combined with an upscale clientele that can pay for better products, that has led to a high full-price sales rate, which in turn leads to expanding margins and increasing profits. Lululemon's operating margins are unbeatable in the industry compared to On as well as giant competitors like Nike, Under Armour, and Adidas.
LULU Operating Margin (Quarterly) data by YCharts
It's still growing sales quickly as well.
| Metric | Q3 2022 | Q4 2022 | Q1 2023 | Q2 2023 | Q3 2023 |
|---|---|---|---|---|---|
| Sales growth | 28% | 30% | 24% | 18% | 19% |
Data source: Lululemon quarterly reports. All increases are year over year.
Its brand awareness is already high in the U.S., and it's leveraging that awareness into engagement and sales growth. And it's focusing on increasing its share in international markets, as well as in men's products and digital. Revenue increased 12% year over year in the U.S. in its third quarter (ended Oct. 29), but international sales increased 49%, and there's a long growth runway in those markets.
Lululemon stock has crushed the market over the past five years, with a 330% increase versus 75% for the S&P 500. Trends continue to work in its favor, or better said, it's helping to drive trends that benefit its brand, and that's likely to continue into 2024.
The case for On Holding: Low brand awareness
Conversely, I would argue that it's specifically On's lower, but growing, brand awareness that gives it so much potential to be a market-beating stock in 2024. On has high brand awareness in its home country of Switzerland, but even there it has plenty of room to grow. In other countries, it's still building its name.
Image source: On Holding.
On has positioned itself as a premium activewear brand with pricing similar to Lululemon. But it's taking a page from the Nike playbook, with a group of high-profile brand ambassadors in various sports. It has caught on with legions of fans willing to pay for the comfort and performance that come along with its footwear, but it has also developed a full line of branded apparel and accessories.
It has been reporting incredible growth since going public in 2021.
| Metric | Q3 2022 | Q4 2022 | Q1 2023 | Q2 2023 | Q3 2023 |
|---|---|---|---|---|---|
| Sales growth | 50% | 92% | 78% | 52% | 47% |
Data source: On quarterly reports. Growth is year over year.
It's feeling some pressure from inflation, but it targets an affluent and resilient customer base that can manage better through inflation than the general public can. As inflation looks like it's moderating, growth should begin to accelerate again.
What's exciting about On's potential is that along with high growth, it has posted positive net income for the past three consecutive quarters, and its gross profit beats all of its large competitors, including Lululemon.
ONON Gross Profit Margin (Quarterly) data by YCharts
On stock isn't cheap. It trades at a forward price-to-earning ratio of 34. But it deserves some premium for its fantastic growth and potential. And it's cheaper than Lululemon, which trades at a forward price-to-earning ratio of 35.
Which will be the winner in 2024?
Both of these stocks could be massive winners in 2024. Lululemon is more reliable, having already demonstrated its brand power and robust profitability. It's the better buy for risk-averse investors, and it's on my list as one of the 10 top stocks for 2024.
But if you have an appetite for some risk, consider buying On stock. It could turn out to be a multi-bagger, and this is the opportunity to get in early.
