A strong product pipeline and experiential, technical fabrications are expected to give outdoor and athletic brands a boost to carry the category’s growth momentum through Summer 2020.
John Kernan, equity analyst for retail and consumer brands at Cowen & Co., concluded that emerging trends and pipeline innovations will remain consistent, “fueling top-line and margin growth.” Kernan made that conclusion after attending Outdoor Retailer Summer Market in Denver last week. Companies participating were showing Spring 2020 lines and, in some instances, Fall 2019 lines.
“The summer market provided insight into emerging trends and a pipeline of innovation which appears robust. While tariffs were front of mind, the buzz across the exhibition floors appeared to squarely highlight the trends toward experiential, technical fabrications that provide lighter, breathable and moisture-wicking materials, sustainability and performance/lifestyle,” he said.
The analyst raised his stock price target for the “outperform”-rated VF Corp. to $100 from $90 and upped “market perform”-rated shares of Skechers to $32 from $30. And of the two, he gave a shoutout to VF, noting that “innovation is accelerating” at the company. He also cited top- and bottom-line concerns regarding the volume of manufacturing that’s done in China for Skechers’ product line.
Below are some of the highlights and impressions he had from what some brands were showing at Outdoor Retailer, including Patagonia, Under Armour and Columbia Sportswear’s Mountain Hardwear. Of the group, the latter three are publicly traded, although neither of the companies held any meetings with analysts. Kernan’s impressions on what’s new and innovative are his read on what can drive consumer interest in the brands and sales in the outdoor category.
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Kernan reiterated his “outperform” rating on VF shares, but also noted that he thinks initial sales and earnings per share guidance is “conservative” for fiscal year 2020. The analyst based that in part on his impression that The North Face brand would reaccelerate due to improved innovation and brand positioning, while Vans is likely to remain above projected targets. VF will host its Investor Day on Sept. 25 with new five-year targets, and Kernan believes that would be a “positive catalyst” for VF shares.
VF Corp.’s Brands
Specific to The North Face, Kernan was impressed by it FutureLight high-performance fabrication offering, which the analyst described as allowing for breathability as moisture and air move through for waterproofing. “The manufacturing [for the fabrication] uses a new process of nano spinning and a unique bonding process. FutureLight will be available in [the brand’s] performance, trail and lifestyle categories, including its Summit and Flight series,” the analyst noted.
Kernan noted VF’s Altra as a specialty trail running shoe designed with no crowding in the toe box that uses a ZeroDrop equal level cushioning platform. The brand plans an upcoming VIHO road shoe that has price points between $100 and $130, as well as the introduction of a new entry price point shoe for runners new to the brand in Spring 2020.
Kernan was also impressed by the merino wool fabrications shown at Smart Wool and Icebreaker, both also under VF ownership. He described the Spring/Summer 2020 ultra lightweight merino socks as functional due to the fabric’s promotion of breathability, odor fighting and sun blocking properties. Similarly at Icebreaker, the analyst noted that the Cool-lite technology has plant-based Tencel and natural merino fibers creating breathable assortment designed to resist odor, wick away moisture and regulate body temperature.
Skechers
Even though Kernan raised the target price for the company’s shares, he also kept his “Market Perform” rating because he’s looking for more clarity on the Skechers‘ “domestic wholesale rebound and international profitability” before considering whether or not to up his current rating. Also a concern for the Cowen analyst is the “outsized EPS risk” for the company given that its regulatory filings with the Securities and Exchange Commission note that the majority of its products sold in the U.S.–representing 50 percent of total company sales–are manufactured in China. That in turn reflects a harder-to-gauge estimate for future results due to uncertainty regarding price increases and how higher costs might flow through the manufacturing and retail chain.
That said, Kernan liked the newness the company showed in performance, run and lifestyle categories. He cited the new Go Run 4 performance running shoe, featuring a Hyper Burst proprietary foam cushioning midsole combined with a knitted upper. Suggested pricing was $120 for a sneaker that Kernan described as “very light to the touch.” He also noted that it appeared that Skechers was broadening its apparel offering, a move that is more connected to testing expansion into wholesale beyond its own direct-to-consumer channel.
Patagonia/Under Armour/ Mountain Hardwear
A new Torrentshell rain jacket, women’s climbing pants and Capilene cool tech base layers and tees were noted by Kernan for Patagonia, specifically with the base layers comprised of a fabric that’s from a mix of recycled materials that offer breathable, fast-drying properties.
At Under Armour, Kernan said apparel offerings for men and women were diverse. He did note that the sales team was highlighting “how a mineral-infused fabric absorbs the body’s energy, and reflects that energy back into tissues and muscles” to help with endurance and strength. Cowen has a “market perform” rating for shares of Under Armour.
Mountain Hardwear, a brand owned by Columbia Sportswear, has struggled in recent years, and the new focus highlighted at the show centers on performance and innovation. “Following a multiyear effort to stabilize Mountain Hardwear, including a change in brand management, we liked what we saw,” Kernan said, noting examples on display of the synthetic insulation it was using that had “warm, breathable, durable and sustainable attributes.” Cowen has an “outperform” rating for shares of Columbia Sportswear.