Athleisure

What Is Athleisure?

Athleisure refers to a fashion trend characterized by athletic clothing that is both comfortable and aesthetically appealing. The growth of athleisure has also created significant opportunities for investors.

Understanding Athleisure

Athleisure grew out of the dynamic use of the yoga pant. Although yoga pants were designed for the gym, their comfort and simple look led women to start wearing them in casual and formal settings. Initially popularized by women, athleisure has branched into men's clothing as well. Additions to the athleisure lineup include leggings, tights, sweatpants, sneakers, hoodies, and jackets. Improved textiles have allowed sportswear to become more versatile, comfortable, and fashionable.

Lululemon Athletica is regarded as the brand that sparked the athleisure trend, but it didn't stop there. Other early adopters of athleisure include Nike and American Apparel. Athleisure as a market continues to grow, replacing traditional activewear and even cutting into jeans sales. Companies such as Levi Strauss & Co. and Kate Spade & Company are rushing to release products to fit the market. As with any product trend, companies struggled not to be left behind, and investors can capitalize on this opportunity.

The popularity of athleisure led to major gains for companies who followed the trend. Lululemon's stock (LULU) has been volatile, but it rose substantially between 2017 and 2020. In large part, Lululemon had considerable success due to the rising popularity of athleisure and the company's position in the center of that trend.

Benefits of Athleisure

As demand for athleisure apparel increased during the mid- and late-2010s, the athleisure sector provided opportunities for growth investors. Growth investors prefer new products, new companies that have strong earnings growth, and stocks that frequently hit new highs.

As of 2020, athleisure companies fit that description well. In some ways, the growth of athleisure is similar to the trend toward fast-casual dining. As people become more affluent, they increasingly want to combine quality with convenience. That larger trend could support the continued growth of both athleisure and fast-casual for some time.

Successful growth investors often focus on one or two leading companies in an industry to profit from a trend. For athleisure, that stock was Lululemon Athletica between 2017 and 2020.

Athleisure has carved out a niche for itself in the clothing industry. The athleisure trend was also a primary driver of growth for the apparel industry. Non-activewear sales actually decreased in 2017, while the activewear apparel category continued to grow, according to NDP Group. Athleisure sales rose about 2 percent to $48 billion in 2017.

What is more, growth in athleisure picked back up. By late 2019, sports leisure footwear was growing at 7% per year, compared to declines for both fashion footwear and performance footwear. Lululemon's stock rallied in 2020, as price targets rose and analysts predicted strong momentum amid reduced impact from the coronavirus crisis.

Criticism of Athleisure

The meteoric rise in the stock prices of many athleisure companies since 2017 has created a high degree of potential downside risk. There are the usual reasons for concern that value investors would site. These include high P/E ratios and relatively new firms without long track records.

There were also potential issues with athleisure from a long-term growth point of view. Market leader Lululemon Athletica already had a market capitalization of over $40 billion by early October 2020. That compared with nearly $200 billion for much better established Nike (NKE). While that still leaves room for growth, those expecting a repeat of Lululemon's near tenbagger performance between 2017 and 2020 are likely to be disappointed.

A stunning performance in the near past could lead to other problems for athleisure stocks. Some of the better technical indicators, such as RSI, flashed warnings in August 2020 before a September correction. From a longer-term perspective, legendary growth investor William J. O'Neil cautioned that most of the money is usually made in the first two years, followed by mediocre returns or a bear market.