5 Stocks For The Hottest Fashion Trend Of 2016

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Includes: COLM, GIII, GPS, JWN, LULU, M, VFC
by: Zacks Investment Research

It used to be that "casual Fridays" and weekend clothing meant one thing: blue jeans. But over the last 10 years, trends have been changing, and a new category of casual clothes has been gaining ground against denim, especially for women.

This trend has many names, with some calling it yoga wear, since it was originally inspired by the emergence of the popularity of yoga. Some now also call the category athletic wear, or performance wear, or even "athleisure".

This is a different category from the actual athletic wear that is made by Nike (NYSE:NKE) and Under Armour (NYSE:UA). They actually expect you to swim, golf, and run in most of their clothes. They are using athlete-level high-performance fabrics and performance-enhancing design.

The yoga wear trend is all about consumers buying athletic-looking clothes simply for their fashion style. People are buying hiking clothes, but they're not going hiking. They want sweaters that dancers wear to and from the dance studio, but they haven't taken a dance class since they were 8.

The Yoga Pant That Started it All

The athletic wear trend really started to take off with specialty retailer lululemon (NASDAQ:LULU) and its popular $100 yoga pant. Originally intended for doing yoga, women adopted it as casual wear over the last decade, and it became de rigueur for women to wear around town even when they weren't in the gym or yoga studio.

Suddenly, yoga pants were "in" and acceptable attire. Then came the explosion of matching jackets and tops for a complete "yoga-inspired" outfit.

It's a Big Market

How fast is it growing?

Yoga itself is only growing in the low-single digits a year in the United States, but yoga wear clothing and accessories are growing in the double digits. Since 2013, the sales of jeans have dropped 6%, but retail analysts expect the athletic wear market to rise by almost 50% to a $80-100 billion market by 2020.

It's important for investors to realize that with a $80-100 billion market, athletic wear is plenty big enough to support several companies in the space. There isn't going to be just one winner. In the auto sector, there isn't just one automaker making cars, but a dozen that are thriving. It's a similar story with the fast food burger chains. For forty years, there has been plenty of room in that market for McDonald's (NYSE:MCD), Burger King (NYSE:QSR) and Wendy's (NYSE:WEN).

What Companies Are In It?

Athletic wear is a big category. You'll find it as the main brand in specialty retail stores like lululemon, Title Nine and Athleta. It is also sold as a sub-brand in retail stores like Pink and Loft.

Additionally, athletic wear is carried in department stores under brands such as Calvin Klein's Performance Line.

The Best-Known Brand

lululemon started the athletic wear revolution and remains the best-known brand. With a $7 billion market cap, it is no longer the small, exclusive start-up of 10 years ago. Sales for fiscal 2015 are expected in the range of $2.025-2.04 billion, up from revenue of just $353 million in fiscal 2008.

Rapid growth has caused growing pains. Management turned over after the company suffered a PR fiasco involving its famous yoga pants being see-through. Consumers felt let down by the brand. More recently, while comparable store sales have rebounded, lackluster guidance and high inventory is plaguing the company.

As a result, analysts have been cutting full-year estimates. It's currently a Zacks Rank #4 (Sell). The shares are also not cheap, with a forward P/E of 27.

The good news is that earnings are expected to rebound 21% in fiscal 2016 as global expansion continues. Analysts are still bullish on the brand, just not in the short term.

The Gap's Athleta Closing in Fast

lululemon's recent struggles with quality control of its yoga pants allowed the door to open to new competitors such as The Gap's (NYSE:GPS) Athleta. Athleta is blending athletic wear with fashion, including operating a "fitness fashion blog" on its web site.

In November, Gap said that Athleta would have 120 US locations by the end of the year, and it continues to add retail stores in addition to running its own web site.

The problem with knowing exactly how successful Athleta is, is that Gap doesn't bust out its comparable sales numbers. The company only provides Banana Republic, Old Navy and Gap comps. The only way of guessing Athleta's strength is by watching the promotions, and those have been strong.

Unlike Banana Republic or the Gap brand, Athleta rarely, if ever, runs a sale for more than 20% off. That's a sign of strength for the brand. It doesn't have to use promotions to drive sales. That usually means higher margins.

Athleta is at a slightly lower price point than lululemon, but you can often find an Athleta and a lululemon store on the same street. They are targeting similar customers.

The problem with wanting to invest in Athleta is that you also get Gap's other brands, which aren't so hot right now. Banana Republic, in particular, just had its worst month of comparable sales in years.

Gap is trading with a forward P/E of just 10, but its earnings are expected to decline 13% this year and rise just 2% next year. It is also a Zacks Rank #4 (Sell).

Columbia Growing prAna

In 2014, Columbia Sportswear Company (NASDAQ:COLM) acquired small yoga and lifestyle clothing maker prAna. The bet on athletic wear appears to be paying off.

In the third quarter, global prAna net sales rose 22% to $34.4 million. That's big growth, but prAna, like Gap's Athleta, is just a small part of Columbia's overall business. The Columbia Sportswear brand itself had sales of $609.7 million in the third quarter, dwarfing prAna. But if you want prAna, Columbia's other brands aren't a bad bet. They are operating on full throttle right now.

Columbia has beat-and-raised two quarters in a row, which is impressive given the challenging retail environment. It is trading with a forward P/E of 18. Analysts expect double-digit earnings growth this year of 16.3% and another 13% next year. The stock is a Zacks Rank #3 (Hold).

Department Stores Aren't Out of the Game

The prominence of athletic wear is obvious even in department stores such as Macy's (NYSE:M) and Nordstrom (NYSE:JWN).

Two big players in that space are G-III Apparel Inc. (NASDAQ:GIII), which has been cashing in on the craze through its Calvin Klein Performance Line, and V.F. Corporation (NYSE:VFC), which owns North Face and the lucy lifestyle brand.

Both of these companies have many different brands and focus, however, including in footwear, accessories and other clothing lines. Investors don't get pure-play athletic wear picks with these.

But G-III Apparel is attractively priced, with a forward P/E of 17.4. It is expected to grow earnings by 19.9% this year and 18.8% next year. It's a Zacks Rank #3 (Hold).

V.F. Corporation is more expensive, with a forward P/E of 20. Growth is more anemic as well, with earnings growth of just 3% expected this year, but rebounding to 13% next year. VFC is currently a Zacks Rank #4 (Sell).

Still in the Beginning of the Build-Out

We are still in the beginning stages of the expansion of the trend of athletic wear. As a result, some of these brands are experiencing growing pains, which is reflected in the current Zacks Ranks. Remember, the Zacks Rank is a short-term recommendation of 1-3 months.

But it's like McDonald's in the 1970s, just as it was beginning to expand across the country. There was still a lot of growth to come in its future.

The athletic wear trend doesn't appear to be going away anytime soon. If nothing else, it is the opposite. It is picking up momentum. Before you know it, instead of casual Fridays where you can wear jeans, it will be casual Fridays with everyone wearing their yoga pants and leggings. By the way, there are yoga pants for men too.

There are a lot of ways to invest in this fashion trend. Keep your options open. It's a big market. There won't be just one winner.

[In full disclosure, the author of this article owns shares of GIII.]

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