This week has been all about thematic investing at Morningstar.co.uk. So we asked our Twitter followers to choose a theme and they’ve gone for consumer trends, ahead of nutrition and forestry.
Our spending habits have changed dramatically since the pandemic, but they are likely to change again as shops and restaurants start to re-open and holidaymakers begin to travel again. We’ve looked in detail at the key trends to watch, from music streaming to pet grooming, and whether they can continue in 2021 and beyond.
Best in Class
When people think of consumer trends they often think of consumer brands. During lockdown it’s been the consumer tech giants like Amazon (AMZN) and Apple (AAPL) that have thrived. These companies are ranked one and two in the Interbrand Global Brands survey, and investors in both stocks were rewarded with gains of more than 70% last year.
But for our stock of the week, we were looking for a “best in class” consumer brand, which isn’t a technology firm but has a foothold in many of the key consumer trends, such as sportswear and premium products. We’ve gone for sportswear brand Nike (NKE) – which like Apple and Amazon, uses its brand power to maintain its market position (Nike is number 15 on the Interbrand list, the highest clothing company on the list).
Like Amazon, Nike has a wide economic moat, or strong competitive advantage, and Nike’s brand is a key part of this. “Our wide moat rating on the company is based on its intangible brand asset, as we believe it will maintain premium pricing and generate economic profits for at least 20 year,” says Morningstar analyst David Swartz. The idea of the moat was popularised by Warren Buffett, who owned Nike shares between 2005 and 2010, and sold them for around $20 per share – they’re now $133.
China Concept Stores
Nike's share price is the stock's one drawback for Morningstar analysts who cover the company. The shares are currently overvalued, according to David Swartz, who says the fair value should be $118. As a US growth stock, Nike was very much in favour last year, with shares rising 36%, which is impressive given that many of its stores were closed in 2020 because of the pandemic. Disruption to sporting events and the closure of gyms meant that both professional and amateur athletes had less opportunity to use Nike products. Further lockdowns are a risk, says Swartz, but the company is in a good position. “We view Nike as the leader of the athletic apparel market and believe it will overcome the extraordinary challenge of Covid-19,” he says.
With the Beijing government ploughing money into sport, China is key for the company’s prospects, Swartz says: “We believe Nike has a great opportunity for growth in China (where it is the market leader) and other emerging markets.” Nike has around 7,000 stores in China, and all re-opened by mid-May 2020 while many European and US outlets remained shuttered because of the pandemic.
One aspect of the sportswear boom has been the increasing demands by consumers for “experiences” rather than just buying the trainers, shorts and running tops. Challenger brand Lululemon (LULU), which has a narrow economic moat, now offers exercise and yoga classes in its stores. Nike is hoping to benefit from this trend – its “Nike Rise” concept store in Guangzhou, China, offers workshops and events, and can even offer you a professional athlete as a running partner (for a fee).
Athleisure Contenders
The growth in sportswear as a consumer trend in the past 20 years has attracted newcomers like Lululemon and UnderArmour (UAA), who want to grab market share from the likes of Nike, which has been around since 1964.
“Athleisure” is one area in which these companies have managed to take on the dominant player. “The athleisure trend has benefited some of Nike’s more fashionable competitors, such as Lululemon and Adidas, more than Nike. The pandemic seems to have made athleisure even stronger,” says Swartz. Before the pandemic, athleisure came into its own as younger shoppers started to see sportswear as fashion that can be worn in everyday settings. Early signs from UK retail sales data suggests that shoppers are keen to upgrade their wardrobes, especially their casual ones, as they head out of the house more often.
Clothing manufacturers have come under fire for their working conditions, especially in developing countries where these goods are made. The row between China and western brands like Nike over the sourcing of cotton from Xinjiang highlights some of the difficulties in this area.
Nike has a low ESG Risk Rating, according to Sustainalytics, and ranks fourth out of 25 footwear companies in this category. “Nike has been at the forefront of sustainable product development and supply chain transparency (mapping its suppliers since 2014) in past years,” Sustainalytics says. Nike launched a “Move to Zero” initiative in 2019, aimed at reducing its environmental impact during this decade.
