By Thompson Clark, Mauldin Economics
Few brands are as universally recognized as this one—
Just one picture of a swoosh, and everyone knows we’re talking about Nike (NKE), the wildly successful athletic apparel company.
Since the 1970s, Nike has grown from a small Oregon running shoe company into a $258 billion global juggernaut. So, it’s no surprise that Nike handed astronomical gains to its early investors. Shares have soared nearly 1,000-fold since the company’s 1980 IPO.
A $1,000 investment in Nike in 1980 would be worth over $900,000 today. But let’s face it—Nike is a bit of an outlier. Very few apparel companies will ever be that successful.
Fortunately, you don’t need to find “the next Nike” to make money in athletic apparel stocks. Even the more modestly successful companies can deliver tremendous returns, as I’ll show you in a moment.
In this issue of Smart Money Monday, we’ll also look at an exciting Swiss running shoe company that’s set to go public any day now. I think it has the potential to become the next big winner in the athletic apparel space. But before we get to that…
- You’ve probably noticed that athletic wear isn’t just for athletes anymore.
Today, people wear running shoes to the office and yoga pants to the grocery store. Lululemon (LULU) has played a big part in this trend. The company practically created the “athleisure” category, as its yoga pants became an “everywhere” pant for young women.
Early investors have benefitted big time from this trend. Shares of Lululemon have shot up 28X since the company’s 2007 IPO.
- Under Armour (UAA) has also grown into a dominant player in this space…
Former collegiate football player Kevin Plank founded the athletic wear company in 1996, selling moisture-wicking shirts out of his car. Like Nike, the company gained momentum by sponsoring collegiate sports teams and partnering with high-profile athletes, like basketball star Steph Curry.
Today, the $10 billion company sells a full line of athletic wear—everything from basketball shorts to hats to fishing shoes. And that’s translated into big gains for investors. Despite a few bumps along the way, shares of Under Armour have risen 7X since its 2005 IPO.
- Lululemon and Under Armour had a few things in common when they went public.
For one, they weren’t complete unknowns. They each had sales of over $150 million when they IPO’d. Yet they still had plenty of room to grow. Today, Lululemon and Under Armour both do over $4 billion in annual sales.
This is one of the upsides to owning athletic apparel brands. They often begin as niche companies—selling running shoes, or yoga pants, or moisture-wicking t-shirts. But they have a lot of room to expand from there. In fact, virtually everyone is a potential customer.
This is why an apparel company that already generates hundreds of millions in sales has the potential to generate billions in sales—and make investors rich in the process. Which brings us to the newcomer I’ve been tracking…
- Could this shoe company be the next Nike?
Maybe. But like I said, even if it’s just a fraction as successful as Nike, it could still hand early investors huge returns.
I’m talking about Swiss running shoe company On, which was founded in 2010 by a group of Swiss athletes and entrepreneurs, including six-time Ironman champion Olivier Bernhard.
As a world-class athlete, Bernhard couldn’t find the type of shoe he wanted. So, he and his partners decided to make them. The company has already generated nearly $500 million in worldwide sales. And my research shows it still has lots of room to grow.
- On’s shoes have a pretty distinct look…
Some might even call them a little gimmicky. But I can assure you they are not. My wife and I aren’t runners, but we are both big fans—we’re each on our second pair. Just like Nike and Under Armour before it, On made products for more serious athletes first. Then it expanded into the vast market of people who wear running shoes and other athletic apparel in their everyday lives.
And just like Nike and Under Armour, On has partnered with a high-profile athlete to help it grow. Tennis superstar Roger Federer invested in the company in 2019. And it now sells a “tennis-inspired” shoe bearing his name.
- On’s sales have grown 60% over the last year.
To put that in perspective, sales of Lululemon and Under Armour have grown around 20% annually since their respective IPOs.
Even better, my research shows that On’s sales could continue to grow 35% a year for the next 5 years. And 10 years out, it could easily be the size of Lululemon or Under Armour, generating around $4 billion a year in revenue.
As I mentioned earlier, On is set to IPO any day now—likely at around $20 per share. I’m very interested in this company. But at this point, I plan to wait for a more attractive entry point.
After all, buying shares on the cheap is critical. And sometimes a stock will crater after an IPO before marching higher. And if this does turn into the next Lululemon or Under Armour (or even Nike), we want to maximize our profits.
I’ll let you know when it’s time to pull the trigger.
Editor, Smart Money Monday
Originally published by Mauldin Economics, September 13, 2021.