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New Opportunities for Investors in Fitness Industry

- By Adam Lawrence

Globally, individual and team sports are seeing increasing participation with the latest trend toward healthier lifestyles, growth of new types of sports and developing countries realizing increases in discretionary spending. There is no question that we have seen a rise in the acceptance of casual wear, as opposed to the traditional "jeans and T-shirt." More often we are starting to see more women adopt the "yoga pant" look instead of any alternatives. From the product arena, performance of these products has become the bigger focal point of athletes looking to gain an edge in their sport.

With top trends in fitness pushing the barriers of mixed training methods, we are seeing future growth in sports like high-intensity interval training (HIIT), yoga, group training like CrossFit and personal training. It has even been encouraged by the medical field in regard to "exercise as medicine." With so much perceived growth in the space, many of the market leaders have been realizing slower sales growth overall, which could be an opportunity for new market disrupting companies to take advantage of these trends and capture market share.

The number two U.S. sportswear maker, Under Armour (UA), recently reported its slowest quarterly sales growth for the period ended Sept. 30. This was a result of slower sales in its biggest market, North America. Sliding gross margins were a focus of this loss in growth. The company saw stronger total sales, gained new sponsor athletes like Steph Curry and even saw an increase in net income. Several analysts mentioned the loss of sports retailer Sports Authority as a customer was a major contributor to slowing growth.

Not to get anything mixed here, Under Armour did report net sales for North America coming in higher for the quarter by a little over 15%, but this was below the 20% growth mark the company normally reports.

Similarly, Adidas (ADDYY) has been toying with the idea of dropping its Reebok line for months now. The subsidiary has received much more attention due to its agreement to become the sole sponsor and partner of the CrossFit brand. Despite this, however, Adidas has also realized similar slowing sales growth, specifically in North America. Kasper Rorsted took over as CEO in October and is already facing pressure from investors. The CEO has a history of being able to cut costs and increase margins, but recent financial results show otherwise.

In fact, for the first time in recent history, the Germany-based company recorded quarterly figures that failed to beat market expectations. On a currency-neutral basis, sales growth has come in roughly 4% shy of its second quarter growth figures. Many analysts have alluded to the fact that Reebok could be slowing the company down, but even amidst slower growth and speculation, Rorsted has continue to support his stance on making it work. Adidas spent over $3 billion in 2006 to purchase Reebok as a play to boost U.S. sales, but over the last three years it has not grown at all in North America. Rorsted will focus on building the brand more independently of Adidas to overhaul and streamline Reebok.

With North American sales becoming a major focus for large companies like these, there are several smaller ones who have realized significant growth in the U.S. In a recent press release, ExoLifestyle Inc. (EXOL) announced that it had seen an increase of 106% in quarterly sales compared to its previous quarter numbers. CEO Vaughan Dugan hinted at surpassing these figures in the next quarter as well.

These results come on the heels of several key announcements regarding the company's new distribution outlets. Earlier in October, ExoLifestyle announced that it would be increasing inventory to accommodate increased product demand. This was followed up with the announcement they had secured Rogue Fitness HQ as a major U.S. distributor, just prior to signing NFL first-round pick Keanu Neal as brand ambassador.

Rogue operates as one of the primary providers of CrossFit boxes around the world and has been providing gear to the CrossFit Games since 2010. Rogue is also one of the largest wholesalers and distributors in the world that is geared toward fitness brands.

Looking toward businesses that have adapted to changing trends, facilities have begun to benefit greatly with exceeded expectations on growth. Planet Fitness (PLNT), for example, recently topped analyst expectations after the company posted third-quarter results. Planet Fitness saw a 26.4% year over year increase in revenue. This has helped boost new estimates from the street, with firms like Cowen & Co. restating an outperform rating on shares of the company. In fact, of all 9 analysts covering the stock, 100% rate Planet Fitness as a "Strong Buy" now.

Just like ExoLifestyle, Planet Fitness posted triple-digit growth except for its earnings. As of its most recent quarterly filing, Planet Fitness saw earnings growth of 172.72%.

In the end, it all comes down to growth. Currently, the long-standing market leaders have slowed, which could be giving rise to new opportunities in the space as the industry continues to expand. The ever-changing choices of shoppers, rising prices of raw materials and huge expansion in e-commerce are propelling the ongoing need for evolution by brands. This has made way for unique up-and-coming businesses to target this market and capitalize.

Disclosure: The author owns 377,112 shares in EXOlifestyle and no shares in any other stock mentioned.

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This article first appeared on GuruFocus.