Luxury Consumers “Just do it” - “where they want, when they want and how they want”
Nike on Monday evening had analysts scrabbling to revise forecasts up along with its shares. Branded Sportswear companies have been particularly quick to adapt to the COVID19 new normal. Realisation of this has seen consensus EBITDA forecasts for Nike revised up +20% in the last week. Nike CEO, John Donahoe, is guiding to high single-digit growth to low double-digit growth this fiscal year (May 2021) with gross margins unchanged COVID19 notwithstanding. Branded Sportswear companies which have pricing power comprise 9% of Dominion’s Luxury Consumer Fund. They rose sharply on Tuesday in weak markets.
Branded sportswear is enjoying a variety of structural growth tailwinds. COVID19 has heightened health & wellness awareness. Home or hybrid working has reduced the need for formal clothes. Branded sportswear had been steadily taking share of the $1.5 trillion global casualwear market before COVID19. This has accelerated. So too has female participation in sports. Both sexes now increasingly seek attire that helps them become healthy rather than simply preens. This has sounded the death knell for the many traditional accessible luxury apparel but has been great news for tier 1 branded sports companies, like Adidas and Nike.
Tier 1 branded sportswear companies have also been extraordinarily quick to adapt distribution to ecommerce. This is because huge legacy sports sponsorship budgets had reinforced the dialogue between the companies and end consumers/sports lovers. With a direct line with consumer already well established the companies have been able to expand ‘Direct to Consumer’ distribution rapidly. In Nike’s case rapid growth in direct distribution more than compensated for weak physical distribution this quarter, though the latter is expected to steadily pickup. Digital ‘Direct to Consumer’ sales should grow 83% in the quarter. Like other companies in the Luxury Consumer universe, Nike’s CEO observed that the business made 10 percentage points more margin on digital than wholesale. So as digital builds (it is currently 30% of sales and growing 83%), Nike gets improving operating leverage. Inditex, another company in our portfolio, said the same thing a week earlier.
What differentiates our Luxury Consumer fund is that we see Luxury as the ability to charge a premium (pricing power) for often aspirational goods and services. Growth and growing operating leverage are what we look for in companies which to cite Nike’s CEO are “able to give consumers what they want, where they want, when they want and how they want”.
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