As we've discussed in the past, the last two years have been difficult years for the athletic footwear and apparel industry and it has sought to reestablish the balance between supply and demand. Only a few brands have remained relatively unscathed. Lululemon is one of those brands, and we recently wrote about its success in Los Angeles (where it is the leader in terms of capturing demand).
However, one miss by Lululemon, with the benefit of hindsight, was its purchase of the Mirror business (purchased for $500M in June 2020), and last week, Lululemon unwound that decision by discontinuing the hardware part of the business and by partnering with Peloton. Peloton will “become the exclusive digital fitness content provider for lululemon, and lululemon will become the primary athletic apparel partner to Peloton...Starting on Nov. 1, 2023, lululemon Studio All-Access Members will have access to thousands of Peloton classes for the same price they pay today, as Peloton becomes the exclusive provider of digital fitness content to lululemon Studio Members.” That is called supply/business rationalization and is part of the healing process and getting supply and demand in balance for the industry.
In another sign of healing, Nike reported an improvement in North American industry inventory during its Q3 2023 update last week. Nike CFO Matt Friend noted, “[W]e were pleased to see high single-digit to low double-digit retail sales growth and strong inventory management with many of our key partners, including Dick's Sporting Goods and city specialty partners in North America...We continue the reset of our business with Foot Locker, planning for near-term sales declines as they invest in consumer-right concepts for the future.” In terms of its U.S. retail business, Nike stores saw a +7% increase in sales. Friend shared, “In a competitive environment, our retail sales momentum grew throughout the quarter across Nike Direct and wholesale. Nike's back-to-school performance outpaced the broader industry with strong sales from our top franchises and clear consumer excitement around newness.” Of note, store sales growth also includes new doors and over the past year, and Nike has opened a lot of new doors.
Nike has opened/re-bannered a lot of locations as Nike Well Collective, including the latest at the Bethesda Row shopping center, which we show in the screenshot below.
All total, there have been roughly 38 new Nike locations over the past year. Below we compare the Nike location in the University Park Center Mall in Fort Worth, TX to the nearby Lululemon location. The Lululemon location attracts about 60% more visitors who come from trade areas that are more affluent ($77K median household income versus $65K for Nike) and less ethnically diverse, which wasn’t a surprise. What was a surprise was how complementary the Nike location's visitation trends were relative to Lululemon, with only a 53% overlap. Said differently, this new Nike Well Collective brings new customers to the University Park Center Mall.
Nike has also newly created the Nike Unite banner, with roughly 12 new stores created over the past year (many of which were formally Nike Factory Store banner). Many of these are very new, and so we will have to review visitation trends in a few months.
We've also spent time looking at On Running’s and HOKA's success in the U.S., which has been a pressure point for Nike, Adidas, and other incumbents, resulting in too much inventory and the supply/demand imbalance. This week, On held an investor day where they laid out their vision for the next several years. Below are a few of the exhibits from the presentation that we thought were new and provocative. For the U.S. market, the next few years should bring more On Running retail locations, a modest expansion of wholesale doors, and a broadening of participating categories into lifestyle and individual movement (training) & sport.
Should they find success in doing so, On's management team expects annual revenue growth in excess of +25%. How that might look in the context of Nike, lululemon, and HOKA is shown in the table below. As the exhibit implies, should these brands continue to put up above industry growth--growth of +4.5%--there will not be “extra pie” left for other brands. To conclude, it appears that competition in the premium athletic softlines category will remain intense over the next several years and that in turn will keep competition high for top-of-the class real estate.
