Can Nike Succeed In Lululemon's Game?

  • Nike has decided to reward is shareholders with a higher dividend and bigger buybacks.
  • This makes us suspect that the company will pass on buying Lululemon as earlier speculated.
  • Nike plans to open as many as 1,100 women stores by 2020 to compete directly with Lululemon.
  • Can Nike succeed in Lululemon's game?

It appears as if Nike (NYSE:NKE) will not, after all, buy Lulu (NASDAQ:LULU) as had earlier been speculated. Nike has decided to reward shareholders, helped by a great quarter, with higher dividends and fatter buybacks, which implies that the company is not interested in buying yoga pant maker Lululemon. Nike has announced it will increase its quarterly dividend 15%, or 11.5 cents to 32 cents, which marked the 14th year in a row that Nike has increased its dividend. Nike, however, is not exactly a dividend champion since its shares yield just 0.95%. Luckily there is plenty of room for growth since the company’s dividend payout ratio is a lowly 21%.

The world’s largest sneaker manufacturer also announced a 2:1 stock split. Although this move will not change its market cap, stock splits usually have a positive effect on a company’s stock since splitting shares makes them more attractive to a larger group of investors which tends to drive up their value. Nike shares are up 6.6% over the past five days which can be attributed to the recent positive developments. Nike stock is up a healthy 39.5% YTD.

Meanwhile Nike also authorized a huge $12 billion share buyback program, which at current Nike share price would reduce the company’s outstanding shares by almost 11%. Reducing a company’s outstanding shares by as little as 5% is usually enough to induce a positive buyback effect.

Nike to take the game to Lululemon

Instead of buying out Lululemon, Nike will do something a bit more drastic--open women’s stores to compete directly with Lululemon. Nike plans to open as many as 1,100 women stores by 2020. If Nike achieves its goal, then it could end up becoming a much bigger player in the athleisure trend. Lululemon has only about 302 stores, with an average store size of only 2,900-square feet, much smaller than the average store size by the average apparel retailer. Lululemon reported Q2 2015 revenue of $453 million after growing 16% Y/Y. Assuming the average Nike store is able to achieve half the sales by the average Lululemon store, then Nike could be looking at a new revenue stream worth $3.3 billion per year by 2020, or roughly 7% of Nike’s 2020 revenue target of $50 billion.

Of course this estimate could prove to be quite conservative if Nike’s women products prove to be as popular as its sneakers. In fact Nike’s top brass has already predicted that women’s wear will grow to a $7 billion-a-year business for the company by 2020, representing a robust 40% CAGR through 2020.

But whether Nike is able to succeed in its goal to become a mover and shaker in the athleisure space will ultimately depend on whether the trend will prove that it’s here to stay or whether it will turn out to be just another passing fad.

Nike and Athleisure

The concept of athleisure really is nothing more than people wearing athletic apparel in every day non-athletic settings. Think of company CEOs wearing sneakers to work or board meetings or women wearing yoga pants when going shopping after work or a night out. Although U.S. consumers spent about $323 billion on apparel and associated accessories, representing just 1% growth compared to the previous year, the $3.2 billion increase was mostly due to athleisure.

Nike is known as a highly innovative company in the footwear and sports apparel segments, and the company appears set to bring its A-game to athleisure as well. Nike has already come up with innovative blends of polyester and spandex, a prime example being AeroReact, a material that can detect when the wearer is about to begin sweating and loosen up before it happens. AeroReact is an industry-first and demonstrates Nike’s continued lead in developing innovative products.

Nike boasts a huge online community of more than 70 million women. This is a ready audience to which the company can sell its new athleisure gear. The company’s reputation as maker of high quality products will certainly go a long way to helping the company grab a sizable share of the fast-growing athleisure market.

Lululemon has a formidable competitor in Nike.

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