Changing investment trends: why trust Nike and Skechers instead of Lululemon?
Historically, investors have bet on the consumer goods sector whenever the Federal Reserve (Fed) has cut interest rates. Rate cuts typically make financing cheaper and encourage consumer spending. This time, however, the situation is different - consumers are not in as good shape as they have been in the past, leading to an outflow of money from some stocks in the sector.
The impact of weakening domestic demand on retail stocks
Stocks in the retail industry, which are highly dependent on domestic demand and consumer trends, are facing challenges due to changes in the economic environment. One such company is Lululemon Athletica Inc $LULU+3.0%, which has been negatively impacted by recent price movements and analyst downgrades.
Investors are looking to avoid the risks associated with a decline in domestic demand and are therefore turning to companies with greater exposure to international markets.
Strong international brands: Nike and Skechers
International brands such as Nike Inc. $NKE+0.2% can rely on a broader diversification of their financial performance due to their presence in different markets and economic cycles. Skechers Inc. $SKX+5.2% has a similarly strong position, with more than a third of its sales coming from European markets. Investors should understand why the U.S. market is reducing its consumer demand before deciding between these companies.
Key drivers of the decline in consumer confidence
The decline in consumer confidence is due to several factors, including rising unemployment, inflation in core segments such as housing, food and insurance. The mismatch between income growth and inflation is having a major impact on the financial market, which is reflected in the rise in credit card defaults and rising car repossessions, which have increased by 23% year-on-year.
This situation has caused a decline in personal savings, which means that items such as clothing and other goods will be the first items that consumers will cut back on in their budgets. This puts pressure on companies dependent on domestic demand, such as Lululemon.
Lululemon: Why the stock is sinking
Lululemon has been a popular investment since the pandemic when the Fed cut interest rates to historic lows. That situation brought positive prospects for the company at the time. But today's rate cuts come at a time when consumer demand is weakening, which is unlikely to bring the same positive effect as it did a few years ago.
Analysts, including those at Raymond James, Citigroup and Deutsche Bank, have recently cut their target prices for Lululemon stock, reflecting the deterioration in sentiment on Wall Street. The company's stock has also seen short positions increase 10.8% over the past month, a sign of bearish sentiment. Lululemon shares now trade at 50% of their 52-week high, indicating a deep bear market.
Why Nike and Skechers are better choices
Unlike Lululemon, Nike and Skechers have a much larger international presence, allowing them to avoid major contractions in the U.S. consumer market. Prominent investor Bill Ackman recently took advantage of Nike's stock decline to purchase a large stake in the company, signaling the value he sees in Nike, even though both companies face similar challenges.
Nike's stock price is currently at 72% of its 52-week high, significantly better than Lululemon. Similarly, Skechers is experiencing bullish momentum, with its stock at 92% of its one-year high. Bank of America recently raised its target price for Skechers to $81 per share, suggesting a potential upside of 17% from its current value.
For these reasons, investors should consider Nike and Skechers as better investment opportunities in times of weakened consumer confidence. These companies not only have better prospects in international markets, but also demonstrate stronger financial stability compared to Lululemon, which is overly dependent on domestic demand.
Disclaimer: There is a lot of inspiration to be found on Bulios, but stock selection and portfolio construction is up to you, so always do a thorough analysis of your own.
Source: TheMotleyFool