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Global
Sporting
Goods
Primer
On
the
Retail
Offense:
Global
Ways
To
Play
Global Equity Research 14
September
2020
In the last few years, all major global sporting goods companies have upped their
game
to
grow
owned
retail,
making
it
a
strategic
growth
cornerstone. Near-term,
COVID-19
has
further
accelerated
this
shift,
particularly
e- commerce
growth
and
penetration,
which
so
far
does
not
seem
to
be significantly moderating. Qualitatively, the acceleration of global brands DTC is
instrumental
for
customer
engagement/acquisition,
storytelling,
and
brand control
while
quantitatively
positive
for
top
and
bottom-line
financial algorithms, which we outline herein. All-in, we maintain our positive stance on the Global Sporting Goods sector with Overweight-rated Nike (raising price target to $136), Puma, Lululemon, and VFC our top ways to play. Direct, direct, direct. From historically being an industry heavily skewed to wholesale distribution, DTC expansion has become in the last 3-5 years one
of
the
cornerstones
of
the
sports
brands
multi-year
strategies. Specifically,
owned
retail
(stores
+
e-commerce)
has
increased
on average
from 25% of sales in FY15 to 33% in FY19
with our
models pointing to c. 45% penetration over the next three years. E-commerce in particular
has
been
growing
significantly,
on
average
posting
growth
in excess of 30%, and accelerated strongly in recent quarters (albeit boosted by lockdowns), with most brands posting online growth in the very high double digits to low triple digits. A
boost
for
the
global
athletic
brands
and
financial
algorithms.
DTC expansion
has
several
positive
strategic
implications,
namely
enhancing direct consumer engagement and allowing stronger brand control. This shift though
has also
meaningful
financial implications. We
estimate
the
shift should contribute on average c. 350bps of additional topline growth this year and over 100bps p.a. over the next few years, more fully capturing the retail mark-up even on the same units sold. Similarly, the ongoing shift
should
also
continue
to
lead
to
better
GMs,
better
EBITs,
and possibly
better
returns
on
capital
employed.
Overall,
this
shift
should therefore be a
positive support to earnings growth over the next few years and valuations. See our detailed financial analysis inside this note with all calculations available upon request.
Equity
Ratings
and
Price
Targets
European
General
Retail Chiara
Battistini
AC
(44-20)
7134-5417
chiara.x.battistini@jpmorgan.com
J.P.
Morgan
Securities
plc
Georgina
Johanan,
ACA
(44-20)
7134-5791
georgina.s.johanan@jpmorgan.com
J.P.
Morgan
Securities
plc
Philip
Spain
(44-20)
7742-6370
philip.spain@jpmorgan.com
J.P.
Morgan
Securities
plc
Ipsita
Singh
(91-22)
6157-3339
ipsita.singh@jpmchase.com
J.P.
Morgan
India
Private
Limited
Luxury
&
General
Retail
Team Head
Melanie
Flouquet,
ACA
(39-02)
8895-2133
melanie.a.flouquet@jpmorgan.com
J.P.
Morgan
Securities
plc
North
America
Retailing
– Department
Stores
&
Specialty Softlines
Matthew
R.
Boss,
CPA
AC
(1-212)
622-2630
matthew.boss@jpmorgan.com
J.P.
Morgan
Securities
LLC
Grace
Smalley,
CFA
(1-212)
622-4894
grace.smalley@jpmorgan.com
J.P.
Morgan
Securities
LLC
Sector
Specialist
(Sales
&
Trading) contact
details:
Temi
Ladega
-
Sales
and
Trading
(44-20)
7134-2654
temi.ladega@jpmorgan.com
Company
Ticker
Mkt
Cap ($
mn)
Price CCY
Price
RatCur
ing
Prev
Cur
Price
TaEnd Date
rget
Prev
End
Date
adidas
Group
ADS
GR
63,411.58
EUR
271.60
N
n/c
225.00
Dec-21
n/c
n/c
lululemon
athletica
inc.
LULU
US
41,159.70
USD
313.39
OW
n/c
387.00
Dec-21
n/c
n/c
NIKE,
Inc.
NKE
US
188,505.00
USD
118.00
OW
n/c
136.00
Dec-21
118.00
n/c
Puma
PUM
GR
12,683.06
EUR
71.82
OW
n/c
77.00
Dec-21
n/c
n/c
Under
Armour,
Inc.
UAA
US
5,124.06
USD
11.32
N
n/c
12.00
Dec-21
n/c
n/c
V.F.
Corporation
VFC
US
27,287.12
USD
70.03
OW
n/c
74.00
Dec-21
n/c
n/c
Source:
Company
data,
Bloomberg,
J.P.
Morgan
estimates.
n/c
=
no
change.
All
prices
as
of
11
Sep
20.
See page 38 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. www.jpmorganmarkets.com
Chiara
Battistini (44-20)
7134-5417
chiara.x.battistini@jpmorgan.com
Matthew
R.
Boss,
CPA (1-212)
622-2630
matthew.boss@jpmorgan.com
Global
Equity
Research
14
September
2020
Breaking
down
the
USA
players.
We
see
NKE
and
VFC
as
the
largest beneficiaries from the sector’s ongoing shift to DTC w/ LULU notably already benefitting from its fully DTC business model. Specifically, our calculations point to the potential for
the shift to add annually at least 100-150bps to revenue growth, ~40-60bps to GPM expansion and ~300-400bps to EBIT dollar growth each year to both NKE and VFC on our math. On margins, we
see
the
opportunity
for
medium-term
margin
expansion
to
mid-teens
or+200-300bps margin opportunity vs. low-double-digit margins exiting 2019 (& high-teens
longer
term)
embedding
low-to-mid-twenties
digital
margins, materially below LULU’s 40%+ direct margins. To that point, LULU’s online margins of 40%+ are structurally driven by higher average order value, higher apparel mix (=higher gross margins), and lower geographical diversification (= lower
distribution
costs)
as
well
as
lower
marketing
costs
(less sponsorship/athlete orientated) in our view. Importantly, our financial analysis supports recent mgmt. access (see NKE 7/28 Mgmt Access Takeaways & 10-K Tidbits; Reiterate Overweight and VFC 8/14 CEO/CFO Roadshow = Increased Confidence In
Top &
Bottom-Line
Algo; OW). Specifically,
both
Nike
and VFC
mgmt.
cited
“increased
confidence”
in
go
forward
earnings algorithms driven by the accelerated shift to financially accretive digital w/ every
~10
points
of
incremental
online
growth
relative
to
plan
(i.e.
+20- 25%
growth
at
NKE
and
+24-25%
for
VFC)
equating
to
an
incremental +40-60bps
of
revenue/EBIT
dollar
growth
incorporating
+15-30bps additional GPM expansion on our math. Digging deeper into the European players. adidas has so far well delivered on its DTC shift, in
our view, raising its
ecommerce targets twice in the last years,
and
overall
continuing
to
invest
effectively
on
this
channel.
Going forward, it should continue to see significant financial impacts from the digital shift, with c. 120bps and c. 45bps support to topline and GM p.a., respectively. Puma, coming from a smaller retail exposure, and still growing strongly also in wholesale,
has seen so
far a
more
minute benefit. With DTC though
gaining weight within the Group, and reaching a critical scale, we estimate the financial contribution to accelerate to c. 140bps of extra topline growth p.a and around 55bps p.a. of GM support between 2021 and 2023, slightly higher than adidas. With
also
currently
stronger
product
momentum
and
management
execution, we continue to prefer Puma over adidas for the time being.
Table of Contents Distribution Strategies in Flux
..................................................................................... 4 The Financial Benefits of the DTC Shift
..................................................................... 8 The Enablers of the DTC Boost
................................................................................ 15 Some Thoughts on Wholesale Distribution
............................................................... 22 Upcoming Catalysts; NKE 1Q21 Preview ................................................................. 23 Investment Thesis, Valuation and Risks
.................................................................... 27
Distribution Strategies in Flux From historically an industry skewed to wholesale … Sporting goods has always been a sector heavily skewed to the wholesale channel including specialty store chains, department stores, independents sport stores or even general apparel stores. Brands were focused on the product, on bringing innovation to the sector and driving communication with consumers to build and support brand equity. On the other hand, distribution and customer reach were outsourced to third party retailers, able to provide the brands with a larger reach to a customer that usually shopped by product/category rather than by brand.
Within owned retail, the main focus for the brands has been until relatively recently, flagship stores, to promote and support brand equity, and factory outlets. The latter, in sporting goods, is not just a channel to clear excess inventories but a profitable channel the brands actually manufacture for (as products made for outlets can actually carry higher gross margins than main product lines).
Figure 1: Sales Exposure by Channel in 2015 100%
80%
60%
40%
20%
0%
Puma
Nike
adidas
VF Corp
Under Armour Lululemon Retail Wholesale
Other
Source:
Company
reports
and
J.P.
Morgan
estimates.
Note:
Nike
“Other”
includes
Global
Brands,
Converse,
and
Corporate.
Under
Armour
“Other”
includes
Connected
Fitness
and
Licensing.
…to a growing focus on DTC, becoming an increasingly important cornerstone of brands’ strategies In the last few years, all major global sporting goods companies have upped their game to grow owned retail, making it a cornerstone of their strategic plans and priorities.
In fact, since adidas’ CMD in 2015 that introduced the ‘Creating the New’, we have been increasingly hearing about the brand’s intentions to pus...