April 20, 2024

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The Sports Fanatics

Stocks to Buy: Top Sportswear Picks and Megatrends to Watch

  • The sportswear market will double the growth of its nearest competitor over the next five years.
  • Bank of America listed five structural trends that are driving growth in the sector.
  • The bank also listed two stocks to buy and two to avoid.

The global sportswear market is taking off, as more people embrace physical activity after months of lockdown, and is set to post growth figures that are double those of apparel and footwear over the next five years, according to Bank of America. That could make the sector increasingly attractive for retail investors.

A report from the US investment bank estimated the current size of the market to be €310 billion ($360 billion) and projected an annual growth rate of 6% over the next five years. 

“Sportswear is expected to enjoy the highest earnings growth in the consumer discretionary sector other than online retail,” David Roux, a research analyst at the bank, said.

Insider lists Bank of America’s five sportswear megatrends to watch, as well as two stocks to buy – and two to avoid.

Structural trends to watch

Health and wellness is the bank’s first trend to watch. Analysts said consumers are becoming more health conscious in the aftermath of the pandemic, driving up sportswear purchases.

“We think greater consumer emphasis on health and wellness could drive higher sportswear penetration,” Roux said. “On top of an existing trend, Covid-19 has increased people’s focus on self-care and positively impacted attitudes towards health.”

Bank of America also pointed to national policy shifts aimed at incentivising exercise, including the US Personal Health Investment Today Act and the EU Work Plan for Sport, as drivers for growth in the sportswear sector over the next five years.

Roux’s team pointed to female sports participation as another factor helping drive sportswear revenue. In Europe, only 20% of girls participate in organized sports, compared to 80% of boys.

“Women’s participation in sports remains low, with big upside potential,” they said. “Several megatrends support greater participation, which in turn should sustain the outperformance over men’s sportswear in years to come.”

Bank of America estimated that women’s sportswear growth will outpace men’s by 3% until 2025.

Another trend the bank said investors should watch is hybrid working models, with employees “ditching shoes for sneakers” when working from home (WFH).

“Post-pandemic, WFH is likely to command a higher share of workdays than before,” Roux said. “We think the WFH experience has evolved attitudes towards office wear – sustained levels of hybrid WFH and changing attitudes towards formalwear could present a tailwind to sportswear.”

24% of people wore sportswear when working from home last year and 26% expect to dress less formally when returning to the office, according to the bank.

Collaborations between luxury fashion houses and sportswear brands are also helping to drive growth by repositioning sportswear as an affordable luxury. This has particularly influenced the purchasing habits of younger generations.

“Luxury brands are embracing streetwear culture through collaborations with sportswear brands, particularly in footwear,” Roux said. “High-end sportswear provides a pseudo- luxury experience for the consumer – but at a much lower price point.”

Recent footwear collaborations include the Nike x Dior launch, Adidas’ partnerships with Prada and Raf Simons, and Puma teaming up with Rihanna’s fashion house Fenty.

Sustainable product lines are another key differentiator driving growth in the sportswear sector. The incorporation of the ESG (environmental, social, and governance) trend has helped to increase support for sportswear amongst younger generations.

“We believe sustainability is an emerging driver of  brand heat, which particularly resonates with younger generations who are most conscious of the environmental impact,” Roux’s team said.

The number of sustainable products sold online by sportswear brands has surged over the past four years, increasing by 58% per year to 72,000, according to management consultancy firm McKinsey.

Sportswear stocks to buy

Bank of America told investors to target shares in the retailer JD Sports (JDDSF) and sportswear brand Puma (PMMAF). It said they could surge by 45% and 19% respectively, from current prices of £10.35 ($14.10) and €97 ($113).

“JD Sports should continue to benefit as a premium sportswear retailer as consumers seek the ‘hottest drops’,” Roux said. “Its wide-ranging supplier relationships leave limited brand risk, in our view, making it an attractive play on sportswear.”

“Puma is a highly underpenetrated brand which offers one of the strongest earnings growth profiles within global sportswear,” he added.

However, the bank expects Puma’s rival Adidas (ADDDF) and Frasers Group (SDIPF), which runs Sports Direct, to underperform, and listed them as stocks to avoid.

“Two current factors likely weigh on sentiment for Adidas stocks near-term, and suggest it could underperform: China recovery and global supply-chain uncertainties, and ongoing market share losses to key peers,” Roux said. “Our underperform rating on Frasers is based on its less-favoured position in an increasingly competitive wholesale channel, and its complex acquisition strategy.”