The mall has a new leader. Goodbye, Lululemon. Hello, Abercrombie.
After soaring early in the pandemic, sportswear companies including Lululemon have stopped growing, hitting their stock prices hard.
The company, once the darling of the pandemic market, has seen its shares lose nearly one-third of their value in the last 12 months. That’s compared to a staggering 510% rise between December 2017 and 2021. Nike’s stock has also fallen steadily since a pandemic-era boom, although it has been buoyed briefly by its replacement of the CEO.
However, traditional mall apparel retailers, once down-and-out, have rallied in the past year. Stocks for retailers like Gap, Inc, Abercrombie and Fitch, Urban Outfitters, and American Eagle Outfitters have outperformed the market in the 12 months. Abercrombie has seen a 172% return over the past year. Gap stock has risen 89%.
The stocks are reflecting a reversal of fortunes in the mall retail space. Consumers are moving away from the tight leggings that made athleisure famous, into the denim and dresses of old-school clothiers. And investors are following.
“Sportswear demand has been pretty weak in the U.S. and some other regions,” said David Swartz, senior equity analyst at Morningstar. “For the most part this has been a pretty challenging year.”
Decades of decline for Abercrombie and Gap, bookended by the pandemic, prompted both retailers to reinvent themselves. Gap replaced its CEO with former Mattel executive Richard Dickson. Abercrombie reoriented its entire product line and marketing to appeal to the 18-40 age group.
Now, both companies are well-positioned to benefit from recent trends. Consumers are beginning to shop more off price, flocking to discount retailers like Gap’s Old Navy.
They’re also shifting toward looser and boxier looks, in what analysts at Barclays call the “Silhouette Shift.” That means a shift away from the tight-fitting clothes featured by Lululemon. The company pulled a new line of “Breezethrough” leggings in July after consumer complaints that the style was unflattering.
At the same time, sportswear giants like Lululemon and Nike are now seeing more competition. Newcomers like Hoka, Alo and Vuori have eaten into their market space. Lululemon specifically has seen a slowdown in demand in the U.S. and has been struggling to keep enough sizes and colors in stores, according to a recent research note from Wells Fargo.
“Even before the Breezethrough pants came out there’s been a real slowdown in womens’ driven by missed opportunities and assortments, including a more narrow color palette, particularly in leggings for women,” said Matthew Jacob, equity analyst at M Science.
To be sure, despite gains in the past year, Abercrombie’s market capitalization of $6.92 billion, is still only about one-fifth of Lululemon’s, at $33.17 billion. However, many investors are still bullish about their turnarounds.
Alpha DNA Investment Management owned a position in Lululemon stock before its impressive pandemic run, said Wayne Ferbert, managing director of the firm.
“We made great profits on it,” Ferbert said. “It’s one of the best stocks we’ve ever owned in terms of return.”
But the firm has since sold all those holdings. Meanwhile it’s been adding to its position in Abercrombie.
Alpha DNA uses digital marketing data to track a company’s reach with online consumers, helping to predict its growth potential. Abercrombie’s digital footprint began to grow in the second quarter of 2023, attracting the firm’s attention.
“It’s still a reasonably small company,” he said. “They’re executing well.”
Other investors said changing economic conditions prompted them to buy a position in Abercrombie. That was the motivation for Burns Matteson Capital Management to purchase shares at the beginning of the year, said William Burns, president and chief investment officer of the firm.
With inflation decreasing and interest rate cuts expected from the Federal Reserve, consumers would likely start feeling more empowered, Burns said, spending more money.
“Abercrombie is a consumer cyclical company,” Burns said. “They should do well when the consumer is doing well.”
For some retail investors, a personal connection and cheap prices drove them to buy the stock.
Bruce Jackson, a guidance counselor in Southern California, first bought Gap stock in 2022 during the retailer’s acrimonious split with Ye, the artist formerly known as Kanye West. After the rapper made comments widely considered antisemitic, Gap’s stock began to plunge. Jackson’s girlfriend is a loyal shopper of the company’s brands, and he considered the downturn an opportunity to get shares for low prices.
Since then, he has seen a nearly 90% return on his investment. Jackson said he believes he will hold on to Gap stock for the long run.
“I think the company has settled into a consumer position where less is more,” Jackson said. “They’re not doing anything out of the realm of what the Gap has already done.”