Athleisure Boom: Analysts bullish on Lululemon, cautious on Nike

Athleisure is becoming the next big trend, with over 200 new brands entering the market since the COVID-19 pandemic. CFRA Research Analyst Zachary Warring and Head of the William Blair Equity Research Group Consumer Sector Sharon Zackfia join Yahoo Finance Live to discuss their perspectives on stocks within the booming industry.

Warring names Lululemon (LULU) a buy in athleisure, noting that the brand grew 70% in the Chinese market, while Nike (NKE) only grew 6% in the same market. Warring upgrades Lululemon to a Strong Buy rating, explaining that the current stock pressure is an opportunity given Lululemon's continued strong margins. Regarding Nike, Warring expresses skepticism, stating that it is challenging to see where the company can find "its next level of growth." Although Nike is a worldwide brand, he believes its market is saturated and international markets are growing weaker.

Zackfia supports Warring's positive outlook on Lululemon, stating that the brand's US sales were "very healthy" despite some pressure, and the macro headwinds are "things they can fix." Additionally, Zackfia names Under Armour (UA, UAA) as another Buy recommendation, highlighting the brand's leadership transition, which she believes will enable the company to "harvest more margin."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Angel Smith

Video Transcript

[AUDIO LOGO]

JOSH LIPTON: In a post COVID world, athleisure is having a moment the trend soaring into a full-blown industry with roughly 200 new brands hitting the market since COVID. So which names are best for your portfolio? We're looking at how to navigate the big picture with the Yahoo Finance playbook.

We're joined now by Zach Warring, CFRA Analyst, and Sharon Zackfia, Head of the Consumer Sector Equity Research Group at William Blair. Welcome both of you to the show.

And Zach, maybe I'll start with you. And we can start just kind of big picture. Zach, you know this sector very well. You know the names.

I'm just interested kind of broadly, Zach. What are you seeing? How healthy and resilient does this sector look? What are the underlying demand trends look like to you?

ZACHARY WARRING: Yeah, thanks for having me. So, in the US, you're starting to see a little bit of weakening. And that's kind of been happening over the last 12 months as the US consumer kind of deals with a lot of different headwinds.

So in the US, you're seeing a little bit of a weakening. But nothing scary. It's not the apocalypse. The world's not ending.

But you're seeing a softening there. And then internationally, it's kind of company by company. Some companies are pretty much able to grow at will while others have kind of struggled.

So you've seen that with Lululemon and Nike after hours yesterday. Lululemon was able to grow 78% in China, which is pretty incredible. And then Nike only had 6% growth.

So Europe was a little weak for Nike. But you know, Lululemon doesn't really talk much about other markets outside of China other than just their international market. But yeah, I mean, we think it's kind of a win or loser market.

JULIE HYMAN: Sharon, let's get your take on this, too. Where we are in the consumer spending spectrum and how willing, in particular, I think US consumers are to spend on athleisure right now?

SHARON ZACKFIA: Yeah, I mean, I think in the broader context, we continue to see consumers shift to spending on more experiences versus goods. Athleisure is not immune to that. But if you look Athleisure in the context of the broader apparel category, the trends look very good relative to the broader space. So we're seeing resiliency within Athleisure that I think is different than what we see in broader apparel.

JOSH LIPTON: And Zack, let's dig into some specific names here. Talk Lululemon. They reported. Obviously, Zach, investors were disappointed.

But you go from buy to strong buy on the ratings, Zach. How come? Walk us through that.

ZACHARY WARRING: Yeah, so in the last five years or so, you've only had a couple of opportunities to buy Lululemon at under 30 times forward earnings. And right now, they're trading roughly at 28 times. And so we see that opportunity for a great company.

Lulus operating margins continue to trend higher. Obviously, they've got growth in China and internationally. They're seeing a little bit of softening in the US. And that kind of I think is where shares slid last night was once CEO came on and said that they were seeing weakness here.

But we think this is a great buying opportunity. And we love the company. We think the company is one of those, they guide really conservative usually. And then they raised throughout the year.

So we think this is a starting point. We think they'll continue to raise guidance. Our estimates for next year are much higher than what they have.

JULIE HYMAN: Well, and Sharon, I know you're positive on Lululemon as well. Do you agree with Zach that this is the typical Lulu playbook where they're just being overly conservative, or should investors be concerned about the slowing that Calvin MacDonald referred to?

SHARON ZACKFIA: Yeah, and I think just to level set. Lululemon's trends in the US were very healthy through January. So we're talking about six weeks of a slightly slower trend.

February is usually not the tail that wags the dog in broader retail sales. And there are some inventory dynamics that they alluded to. Having better depth in smaller sizes, having more color, these are things they can fix. So it's not all macro.

And I do agree. I mean, this is a company that has a very long history of exceeding its initial guide. We think inventory adjustments. And the marketing activations that they're doing of which there will be three major ones this quarter are probably not fully contemplated as positive wild cards in this guidance. So we think there is room for this guidance to prove beatable.

JOSH LIPTON: All right, two believers there in Lululemon. Zach, I want to turn to another name that did report did disappoint that'd be Nike. It's down about 7% in today's trade. You went to a hold on that name, Zach. Why a hold? What kept you from going to a buy?

ZACHARY WARRING: Yeah, so we had Nike as a so. We've kind of been back and forth sell and hold on Nike over the past two or three years. And we just think we're just concerned on where they're going to get their next level of growth.

Obviously, we love the brand. We know that it's a worldwide global brand. And one of the largest in apparel and footwear.

And we love the balance sheet. That's never been the issue. They buy back a lot of shares.

We're having a trouble figuring out where they're going to get their next level of growth. They saturated the US market. They saw a pop there during inflation.

So, obviously, as they raised prices, they saw a boost in revenues in the US. But the US is saturated. There's some areas of growth in Europe that they can kind of head towards, and you know, soccer, and some other sports but.

Outside of that, and then China's really been disappointing, too. So we're just going to wait and see here. We think there's got to be a better opportunity to buy Nike. And we'd rather wait and see, be patient, and hold here just because we're not sure where they're going to get growth from.

JULIE HYMAN: And Sharon, you don't cover Nike, but you do cover Under Armour. And we just got recently got bombshell news about the departure of CEO Stephanie Linnartz who hasn't been there very long. And Kevin Blank coming back. I believe you're still positive on the name. You still think investors should buy it. Why?

SHARON ZACKFIA: I mean, I think Stephanie architected a big change in leadership over the last year. And 2/3 of the leadership is new. Kevin was involved to our understanding in those acquisitions of talent.

And we think, basically, the goal here is to steer the ship towards growth in the US. They have not had that sustainably for quite a while in terms of revenue. But also harvest more margin.

And so we've thought of this year as a margin of harvesting year as the new creative team and new leadership has the opportunity to really lay the foundation for better revenue growth in 2025. I think that all stays intact. But obviously, we'll have to hear what Kevin has to say on the next call.

But he has been there. He's been chair and brand chief. So, presumably, he has been involved in much of this strategy as well.

JOSH LIPTON: Sharon, Zack, thank you both so much for joining us today. Have a great weekend.

SHARON ZACKFIA: Thank you.