Suiting Up: Women's Sports Apparel Showing Muscle

A person can wear only so many clothes in one lifetime -- that's what makes the U.S. apparel industry a mature and slow-growing business. However, this market, worth $344.5 billion at retail in 2005, isn't likely to disappear.

To capitalize on what growth there is, manufacturers and retailers must stay on top of consumer trends, such as the strengthening demand for sports apparel -- especially in the women's segment. Clothing and accessories sales overall rose by about 3.9% in 2004, according to government data. But sports apparel sales grew by 4.9%, according to The NPD Group/NPD Fashionworld. (The sports category includes multi-use or "lifestyle" clothing, such as gym clothes that can be worn casually around town, as well as technical or "active" gear meant for a specific sport, such as golf or cycling.)

The sales gain for sports apparel overall was due largely to increased spending for women's items, up 10.8% in 2004, notes the Sporting Goods Manufacturers Association (SGMA), a trade group. Women's share of active sports apparel (41.1% of dollars spent) is also close to achieving parity with men's 42.5% share. While active apparel (men's, women's, and children's) declined in units in 2004, average price was up 6.4%, versus a 4.1% price rise on all sports apparel.

In 2005, sales trends favored the lifestyle segment rather than active wear, according to Standard & Poor's Equity Research. While total sports apparel sales saw a 7.4% increase to $44 billion, active wear grew 2.7% in dollar terms, according to NPD. S&P&P; thinks 2005 sales were driven by clothing intended for use, rather than by technical gear or T-shirts from the Gap. Purchasers, according to S&P&P;, were people attracted to an active lifestyle and who may engage in sports recreationally, though perhaps not competitively.

S&P's fundamental outlook for the apparel, accessories, and luxury sub-industry is positive, due mostly to strength it sees in accessories, as apparel manufacturers are under pressure from retail consolidation. S&P's view on apparel retailers is neutral, because of inventory build-ups and long-term demographic weakness due to shoppers' changing priorities. However, some retailers are benefiting from consolidation, S&P believes. Apparel retailers with strong brands, differentiated products at attractive prices, and superior customer service stand the best chance of outperforming their peers.

Demand for sport apparel is supported by technological as well as demographic factors. Currently, 41.3 million Americans hold gym memberships of some sort, according to the New York Times. Women's increased participation in sports has been supported by federal law as well as by the leisure time and cash wielded by the baby boom generation. Performance fabrics, such as polyesters, which improve the feel and function of sporting goods, are likely to increase consumer demand and to fuel dissatisfaction with lower-tech gear.

Within women's apparel overall, females ages 35 and older may present a significant opportunity, according to S&P. This 80-million strong cohort is projected to increase by 1.2% annually through 2010, compared with a 0.8% rise for women ages 20 to 34. Additionally, women 35-plus tend to have the disposable income to spend on clothing.

S&P sees Chico`s FAS (CHS) and Liz Claiborne (LIZ) as poised to profit from this generation, thanks to the customer knowledge, service, and merchandise -- all of which S&P calls "superior." S&P also approves of their entry into women's sports clothes, along with similar strides by bebe Stores (BEBE) and Nike (NKE).

To broaden their revenue base, manufacturers must diversify, in S&P's opinion, as Liz Claiborne did by buying Prana, maker of yoga and climbing apparel. S&P views the company's breadth in brands, sales channels, and demographics, along with its consistently strong financial results, as worthy of boosting its earnings multiples. Another company striking a posture in the yoga market is privately held L.L. Bean. The $1.4-billion mail-order retailer is introducing a cataolgue called Everyday Adventures, with women's clothing suitable for yoga and fitness activities.

Nike, the $13.7-billion sporting goods giant, emphasizes both fashion and function in its products. Women's sports apparel is "a big part of our business, and will continue to grow," said spokeswoman Morgan Shaw. "That includes women's fitness, running, court sports, dance, cardio, and yoga."

The usefulness of sports clothing widens its appeal. A waterproof parka can be worn on a winter hike in the Rockies or during a Detroit blizzard. The outdoor segment of VF Corp. (VFC), which contributed 22% of $6.5 billion sales in 2005, includes The North Face, JanSport, Vans, and Reef. In 2006, the company plans to open U.S. retail stores for Napapijri, its line of Italian-designed ski wear, currently sold in Europe.

With more than 50 million participants and nearly $3 billion in annual sales at wholesale, bicycling is the second-largest category of sporting goods, according to SGMA. Given the market's size, major bike manufacturers have recently begun producing women's lines, a demand that was long filled by niche firms.

Privately held Terry Bicycles, an early entrant in the "women-specific" cycling business, has seen double-digit growth for most of the last nine years, said co-founder Paula Dyba. While the company targets women 25 and up, "an awful lot of our customers are concentrated in the 35-plus age," said Dyba. She estimates that 60% of the firm's $7 million in sales, and most of its growth, now comes from apparel.

The demand may owe something to fashion myths that have expected women to fit the clothes, rather than vice versa. Women who are "thick in the thigh and hip area" can't wear some brands, griped 36-year-old Kim Savage, an avid cyclist and skier who lies in Manhattan. Savage also faulted manufacturers for overusing "girly" colors like pink and lavender, making it hard for her to find attire in red and blue, "strong" colors that she prefers. However, sports bras have been much improved in recent years, she added.

Indeed, sports bras saw a 13.4% rise in sales in 2004, the strongest of any sports clothing category, according to NPD. Though a statistically small part of the business, sports bras are a "good indicator" of demographic trends, said SGMA spokesman Mike May.

Retailers, too, are jumping on the sports treadmill. Such moves position them to benefit from what S&P identifies as "a channel shift from the department store to the specialty store." Earlier this year, Chico's FAS, a $1.4 billion retailer, acquired a high-end clothing line, Fitigues, modeled on athletic wear. Chico's Soma division of intimate apparel for women 35-plus also includes an activewear line; S&P foresees the division reaching $1.0 to $1.5 billion in annual sales. The company has also taken an equity stake in Lucy Activewear, a privately held retailer of "multi-use" women's sports clothing. Lucy "fits into our portfolio," said spokesman Michael Smith. "We feel comfortable targeting 35-plus baby boomer women."

Bebe Stores and Victoria's Secret are both selling sweat suit-inspired lines with a body-conscious fit. S&P regards Victoria's Secret as the "jewel" in parent company Limited Brands' (LTD) portfolio, while bebe Stores' Bebe Sport division is the company's principal growth driver.

Finish Line (FINL), the second-largest sports retailer with $1.3 billion in sales, is opening Paiva, a new chain targeting "active, upscale" women, with 15 new stores to be opened by year-end. Paiva's inventory of 60% apparel, 10% accessories, and 30% footwear apparel includes private-label clothing called Private Essentials and separate sections of the store devoted to athletic and fashion apparel. "Only 20% of Finish Line's customers are women," said spokeswoman Elise Hasbrook. "We know she's in the mall and visiting our stores, so we wanted to speak to her specifically." S&P expects the new chain to offset Finish Line's reliance on teenage customers, although start-up costs will weigh on the retailer's margins.

Mass merchandisers such as Wal-Mart Stores (WMT), sell the most sports apparel in terms of units -- 36% of the total in 2004, according to SGMA. But due to the mass merchandisers' low prices, their share of revenues is only 19%. Specialty retailers, like Gap (GPS), claim 27% of sales. Sports specialty stores, like Foot Locker (FL), got 8.9%, up from 8.0% in 2003, evidence of their growing role. But all retailers serving this market can take advantage of the growing demand.

Much of this workout clothing may never actually get sweaty. Only 30% of all sports apparel is actually destined for an athletic usage, the SGMA reports; the rest is purchased for multiple activities as well as casual comfort. But even if these outfits ultimately end up on the couch, they will still benefit the industry's bottom line. Either way, these companies have good reason to become cheerleaders for women's sports apparel.

While there are no pure plays to this theme, investors interested in the retail sector can consider buying shares of companies that respond punctually and successfully to market opportunities. In addition, sector funds such as Rydex Retailing Fund/A (RYRTX) and Fidelity Select Retailing (FSRPX) also can offer some exposure. The same can be said for funds with a high concentration in consumer discretionary stocks, such as AIM Leisure/A (ILSAX) and ICON Leisure and Consumer (ICLEX).

Contact Bob Keane with questions or comments at: bkeane@investmentadvisor.com.

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