Apparel stocks have struggled over the past year with margin fear, shifting consumer habits, inflation, and slowing growth as part of the narrative. Today's takeaway is that specialty apparel makers are rebounding within the group and have a positive outlook for the remainder of the year and next year. The latest results from ON Holding (NYSE: ONON) suggest that it, at least, can continue higher, and signals are solid for Nike (NYSE: NKE) and Lululemon. All have solid brands, consumer demand and direct-to-consumer channels that continue to outperform expectations and drive shareholder value.
Buying the dip in ON Holdings
ON Holdings couldn't ask for much better advertising than for the winner of this year's Boston and New York City Marathons to wear their shoes. The company's brand strength and value for runners is evidenced by the strength in results, which come with only a single negative: hyper-growth is slowing from above 50% quarterly to below.
The company produced 480.5 million CHF in revenue in Q3, a gain of 46.5% compared to last year. This is down from 52% growth in the prior quarter and will fall to the high 30% range next year. On a constant currency basis, sales are up more than 50%, driven by a 55% increase in DTC channels.
More importantly, the company is expected to continue gaining leverage over the coming year and build on the strength shown in 2023. Earnings for Q3 came in at 0.20 CHF or up 5X compared to last year, aided by the leverage provided by DTC sales. Regarding next year, earnings are expected to outpace revenue growth with a gain of 60%.
Shares of ONON fell more than 5% on the Q3 news, but this is a natural reaction to expected, strong results and led to a rebound from critical support. Support is evident at the $24 level, consistent with 2023's opening price action, and should continue higher. The analysts rate the stock a Moderate Buy and have been leading the market higher. The consensus price target of $35 is trending higher in 2023 and offers a 35% upside for investors.
Nike is set to complete a reversal
Nike shares are down YOY compared to ONON's slight gains, but it is in reversal and set up to complete the reversal given a good Q3 report. The analysts aren't expecting too much. They've been downgrading their outlook for earnings and the price target for the stock, enough to get it on the Most Downgraded Stocks list, but have set the bar for earnings low. Given the performance of ON Holdings and NIke's lean into DTC, Nike could easily surpass estimates and catalyze a shift in sentiment.
Regarding Q3, the analysts expect sequential and YOY growth of a tepid 0.75%. Until then, the analysts rate the stock a Moderate Buy despite the low expectation for results. The consensus estimate is down YOY and compared to last quarter, but still implies about a 15% upside. The outlook for next year is also strong, with revenue growth expected to accelerate and margins to widen.
Lululemon rises on S&P 500 inclusion
Lululemon is not a shoemaker, but results and outlook for ON Holding and Nike reveal consumers will pay for quality specialty athletic products when they need them. Lululemon is a high-quality specialty product with a loyal following in a hot industry and a high level of market support. That support was recently amplified by S&P 500 (NYSEARCA: SPY) inclusion and all the fund and index-related buying that goes with it. The stock is now 91% owned by institutions.
Shares of Lululemon hit a new high following the inclusion, pulled back, and are now moving up to new highs again. That move is supported by analysts' activity with the stock on Marketbeat's Most Upgraded and Top Rated Stocks lists. Regarding the outlook for Q3 results, the analysts expect YOY growth but growth to slow to 17% YOY. Looking to next year, the consensus is for revenue to grow by about 14% and for earnings to grow by 15%.
