Dick's Sporting Goods (DKS +3.69%) shares collapsed following the company's fiscal second-quarter earnings report, as it warned that the athletic footwear and apparel space has become more promotional. In addition, it said there were fewer new footwear launches in Q2, and that those launches underperformed its own and industry expectations.
The commentary was similar to that of JD Sports Fashion, which operates stores under the Finish Line, Hibbett, and other banners. JD Sports also said it was facing a highly promotional environment and experiencing economic and footwear-product-cycle headwinds. Both Dick's and JD Sports are major Nike (NKE -1.79%) retailers, but industry headwinds could extend beyond Nike and affect other brands, including Lululemon Athletica (LULU -1.11%).
Let's look at why I'd be reluctant to buy these two apparel stocks even while they are down.
Nike
Nike is trading at its lowest level in more than a decade, but that is not enough reason to buy the stock. The company's former CEO, John Donahoe, who strained wholesale relationships and eschewed innovation in favor of relying on retro brands, left the company in a bad spot. Meanwhile, its "Win Now" initiative, begun in late 2024 under current CEO Elliott Hill, has yet to help meaningfully turn the company around.
NYSE: NKE
Key Data Points
While it's seen some positives, especially with running, overall, its struggles have continued. This is especially true in China, which was its strongest market before the pandemic.
However, the company has been losing share to local brands, and its sales and margins have collapsed. With the company trying to reestablish itself as a premium brand, the more promotional environment in North America will only add to its woes. It had already been closing stores in North America, which will likely pressure sales, so this just piles on top of that.
While Nike is an iconic brand, the company appears to have lost brand loyalty, and there is no guarantee that loyalty will return. Just look at Under Armour, which was once a hot brand that has now seen 13 straight quarters of revenue declines with no turnaround in sight. Meanwhile, trading at a forward P/E of 23, Nike's stock is still not cheap.
Image source: The Motley Fool.
Lululemon
While the warning from Dick's and JD Sports doesn't have the same direct impact on Lululemon as it does on Nike, there certainly appears to be a general shift away from sporting apparel and athleisure. That's bad news for a company like Lululemon that is already trying to turn around its business.
The company has already been struggling with product missteps and increased competition from newer high-end brands like Alo and Vuori. Meanwhile, it's been without a CEO for an extended period, and the hire of veteran Nike exec Heidi O'Neill, who will take over in September, disappointed investors, including activist investor Elliott Investment Management, which wanted turnaround specialist and longtime retail executive Jane Nielsen to lead the company.
NASDAQ: LULU
Key Data Points
China has been Lululemon's saving grace, with the company projecting 20% revenue growth this year. However, the company committed a major faux pas at a big yoga event held on the Great Wall when it accidentally gave a Chinese actor a Japanese taiko drum to play instead of a Chinese dagu drum. This huge PR misstep could certainly impact sales in what has been the company's best-performing market.
In July, Truist downgraded the stock on concerns that the brand was losing momentum, citing Google and TikTok search trends. With the overall sporting apparel and athleisure market showing troubling signs, the picture for Lululemon is likely only to get worse from here. Meanwhile, like Nike, the company is struggling to maintain its brand loyalty.
While Lululemon looks cheap at a forward P/E under 11, a low multiple on falling earnings isn't always a bargain, and the stock appears to be a value trap.
