Gap Set To Introduce Men’s Athleisure Line, Challenge Lululemon


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Gap Set to Introduce Men’s Athleisure Line, Challenge Lululemon

Gap, Inc. is launching a premium men’s high-performance activewear line, dubbed Hill City, to rival their successful women’s athleisure label Athleta. Combining “highly technical fabrications, performance and style” the Hill City line is designed to be versatile, enabling men to go “from a hike to a dinner out” (presumably with shower in between) without a wardrobe change. Hill City will debut in October as an online retailer, though +/- 50 select Athleta stores will carry select pieces.

Howie Long-Short: Gap acquired Athleta back in ’08 (it was still a catalogue company at that point) for $150 million. While GPS doesn’t break out Athleta’s financials, the company is “progressing well towards well against our $1 billion sales objective”. With Gap brand sales on the decline (and Banana Republic struggling), it’s not surprising to see the retailer look to what has been working – CEO Art Peck said Athleta has been “highly accretive” to GPS earnings – and look to duplicate it’s success (editor note: Old Navy has also been a bright spot); particularly when you consider the category remains the “biggest and fastest growing” within men’s apparel. GPS shares are down +/- 14% since company reported (on August 24th) that Gap brand comparable store sales declined (-5% YoY) even more than Wall Street analysts had anticipated (-2.3% YoY) during Q2 ’18.

While activewear as a sector isn’t growing as fast as it once had, according to NPD Group sales continue to rise faster than the overall fashion industry. Activewear sales rose +2% YoY (on the back of female athleisure) to $48 billion in 2017, accounting for 22% of all retail apparel sales.

Fan Marino: Lululemon remains the most dominant player in the athleisure space. LULU shares jumped 13% (to $154.93) after it was reported that Q2 ‘18 gross profits climbed +33% YoY (to $396.2 million), on net revenue that rose +25% YoY (to $723.5 million), as gross margins increase by 360 basis points (to 54.8%) YoY. With North American expansion planned (adding 40 more stores by the end of ’18), the continued development of the Asian market (sales rose +50% YoY, see: Japan, Korea) and growing e-commerce sales (+65%, 24.6% of total sales), LULU is nearly certain to remain “in a league of its own” through the end of the calendar year. Shares have nearly doubled (+97%) since the start of ’18, they’ll open at $156.99 later this morning.

Back in March, we wrote Outdoor Voices was on its way to becoming “the next Lululemon.” Looking for a couple of other companies that could become household names within the athleisure space? Try RYU (CVE: RYU, trades OTC: RYPPF) and The Upside (NYSE: LUK is a stakeholder), both have found niches within the space and opened retail stores in NYC in ’18.

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Paid Endorser Model “Broken” in U.S., Works in Asia

Naomi Osaka, coming off the U.S. Open championship, will sign a contract extension with Adidas worth $8.5 million/year at the completion of the season; the deal will be the largest the company has ever issued a female tennis star. Osaka’s half-Haitian, half-Japanese heritage, makes her particularly appealing to the western brand seeking to expand its reach in Asia. Interestingly, Osaka’s deal comes just 2 months after Uniqlo, another company “with plans for breakneck speed growth in Asia”, signed men’s tennis star Roger Federer (as a global ambassador) to a 10-year $300 million deal.

Howie Long-Short: NPD Group retail analyst Matt Powell recently said the “paid endorser model is broken”. He’s right, U.S. consumers have gotten smarter and they know “how phony these pay-to-wear (sponsorship) deals are”, which helps to explain how Under Armour could have Steph Curry, Tom Brady and Bryce Harper on the roster and still see their share price decline -60% (from $51+ to $20+) over the last 3 years (UAA shares are +39% YTD so that drop had been worse). Of course, the Osaka and Federer deals aren’t about the U.S. market and generally speaking the Asian consumer is more likely to be influenced by an athlete endorsing a product than the American consumer would be.

So, if sneaker/apparel brands are not earning a return on their investment in athletes, could the end of lucrative long-term (think: Harden. Adidas. 13 Years. $200 million.) sponsorship deals, for domestic stars, be far behind? According to Matt (and a couple of NBA agents), that reality is already here. Most NBA players receive just a “small fee and free product”, while NFL players are offered compensation packages “worse than your standard NBA deal.” One agent told hoops hype “there are probably five relevant superstars out there and while every is chasing deals there aren’t any deals out there to actually get.”

Fan Marino: Elite NBA players earn more money from endorsements than athletes from any other American professional sport. In 2018, the NBA’s 10 highest paid endorsees took in $234 million in off-court earnings, 2.6x ($90 million) the amount NFL’s 10 most marketable players generated; LeBron James ($52 million) alone will take in more than the Top 10 MLB ($25 million) and NHL ($20 million) endorsees combined.

On Friday, Sara Germano (WSJ) translated an investment research note stating, “there may also be potential upside in apparel, as recent NBA player moves to highly dense markets may have resulted in incremental sales” to “Wall Street for LeBron moved to LA.” LeBron is certainly going to sell a lot of jerseys in L.A. (he was #2 in the league last year) but don’t expect his sneakers to fly off the shelves, performance basketball sneakers remain out of style in the U.S. and even Laker’s legend Kobe Bryant “never sold a lot of shoes in the U.S.”

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What is JohnWallStreet?

JohnWallStreet, located at the intersection of sports and finance, is a destination for the educated sports fan.

While we won’t be publishing “hot takes” on LeBron’s relative greatness to Jordan, we will be offering up the most relevant sports related business news, in easily digestible bites, with commentary from both the sports money and sports fanatic perspectives.

We’ll cover publicly traded professional teams & stadiums (MSG, RCI, BATRA, MANU), television networks (DIS, FOXA, CMCSA, CBS, TWX, MSGN), apparel & footwear companies (NKE, UAA, ADDYY, FL, LULU), equipment companies (GOLFELY, FIT), ticketing companies (EBAY, LYV) content and facilities providers (CHDN, DVD, ISCA,TRK, LMCA).  If it trades on Wall Street, and has a sports angle, it’s in our wheel house.

Howie Long-Short and Fan Marino will be providing their expert opinions on each story. They have slightly different areas of expertise. Fan Marino is a firm believer that the SEC is the premier football conference. Howie Long-Short knows it as the Securities & Exchange Commission. Fan Marino lives and dies with the college selection of 5 star, blue chip recruits. Howie Long-Short spends his days analyzing blue chip stocks. Howie Long-Short knows that Black Monday occurred on October 19th, 1987. Fan Marino swears it happens every January after Week 17. You get the point.

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