Sales of athletic apparel are growing much faster than the broad apparel industry, with the global athletic wear market up around 8% in each of the last three years, well above the 2% to 3% growth for general apparel. According to Statista, the worldwide athletic apparel market reached $146 billion in 2014 and could exceed $170 billion in three years.
The industry has historically been dominated by Nike(NYSE:NKE) and Adidas, though today they are confronted by other dedicated athletic clothiers, including Under Armour (NYSE:UAA) and lululemon athletica. But now, these companies also face competition from regular apparel retailers such as Saks Fifth Avenue, H&M, Forever 21, and Gap (not only from its dedicated Athleta stores but also its main Gap and Old Navy brands). And that is only a small sampling of retailers that are tossing their hat into the "athleisure" race.
Is this a bubble?
Even celebrities are getting in on the action, with Pharrell Williams, Kanye West, Carrie Underwood, Blake Shelton, and more putting their names on fitness and lifestyle clothing in the hopes of benefiting from growth in the category.
Compare this industry now to what the "trendy" teen retail industry looked like in the late 1990s and early 2000s when Abercrombie & Fitch, American Eagle Outfitters, and their peers targeted younger consumers with bold advertising and a "don't get left behind" message. These companies made huge profits up-selling "cool" clothing, and the margins were stellar as high-priced apparel was still cheap to produce.
The teen retail bubble grew as other retailers jumped on the bandwagon. Eventually, these companies and their investors realized that the teenage concept of "cool" was more fickle than they thought and not a suitable foundation for valuations. Over the last decade, weak earnings have led to poor share performance for both Abercrombie, down nearly 75% from 2007 highs, and American Eagle, down about 50% over the same period.
In some ways, this athletic wear market is starting to resemble that pre-2007 situation where valuations are based on expected continued growth of products that could just be a fad. If an athletic wear bubble is coming, do Nike and Under Armour have compelling reasons to believe they can continue to thrive and stand out from the competition?
How Nike and Under Armour will survive
The first reason this pair is better positioned than its rivals: a huge portion of their businesses come from footwear. Nike already holds 25% of the global footwear market, and its iconic shoes have penetrated every segment of sports, general fitness, and leisure. And it is not just Nike-branded shoes that are growing sales -- the Nike-owned Converse brand surged in 2014, up 28% (33% excluding currency effects) and contributing significantly to the broad footwear segment.
Under Armour is also making a big play on shoes, with 44% footwear sales growth in 2014 to $431 million. The company has increased its focus on this segment in recent years -- its SpeedForm running shoe line, released in 2013 and updated in 2014, has driven much of that segment growth.
With so many competitors entering the space, you can expect the strong results from current incumbents to eventually level out. But markets have come to expect that same level of growth, as a result, you have bubble-like conditions. Case in point: teen fashion retail a decade or so ago.
That does not mean there are no compelling plays in this space. Investors must bet on companies that are truly differentiating themselves from the competition and are not subject to valuations based solely on fickle consumer trends (printed leggings anyone?).
Nike and Under Armour both fit this bill, as they are already the largest sports apparel companies in the U.S., both with compelling international prospects, strong growth in footwear, and innovative products that their rivals will have a hard time matching.
Bradley Seth McNew has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica, Nike, and Under Armour. The Motley Fool owns shares of Lululemon Athletica, Nike, and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.