One need only look at the number of acquisitions and IPOs in 2021 to know how busy the DTC athletics space has been.
Of course, similar deals were prolific throughout the industry last year, but in the athletics DTC space alone, Sweaty Betty was acquired by Wolverine World Wide, Beyond Yoga was purchased by Levi's and Osprey was snapped up by Helen of Troy (the owner of Hydro Flask). Running brand On filed for an IPO and so did Allbirds, which has increasingly shifted into the athletics space.
Over the last six months, some of the fastest growing DTC athletics brands, in terms of average monthly website visits, included Arc'teryx (which saw its average monthly visits in the U.S. spike 264% over that period), Alo Yoga (124%) and Tracksmith (75%). SimilarWeb, which tracks the data, also highlighted growth at equipment makers like Hydrow (151%), Tonal (149%) and Mirror (105%).
Extending beyond just 2021, Outdoor Voices remains one of the most recognizable names in the DTC space from recent years, and even brands that became popular in other product categories are expanding into activewear to take advantage of the category's popularity. Just take intimates brand ThirdLove: Known for bras, the company in September entered activewear, preceded by a few months by period brand Thinx.
More recently, California-based Vuori raised $400 million from SoftBank with plans for a broad-based expansion, including building out 100 U.S. stores and entering international markets. Founder and CEO Joe Kudla, notably, highlighted that Vuori's been profitable since 2017 and that most of the money raised was to repay shareholders.
"At the time we made the investment in Vuori, which was back in 2019, it was a bit of a contrarian play because as an investor, apparel brands were not in favor with many folks," Jon Kossow, a managing partner at one of Vuori's investors, Norwest Venture Partners, said. "And I think what we saw was a unique and differentiated product category, a remarkable CEO — I mean, Joe's probably one of the strongest CEOs we've ever worked with institutionally and I have over my career — and something that in this product was highly differentiated and versatile."
Norwest is not alone in taking a bet on an apparel brand, though. Other investors have likewise taken an interest in DTC athletics companies in recent years, including GV and Forerunner Ventures, which both invested in Outdoor Voices, and L Catterton, which invested in Sweaty Betty.
So what makes the space so appealing? For one thing, athletics is now one of the bright spots in an otherwise challenged apparel sector. It feels like everyone in retail wants in on the athleisure trend, and DTC brands can not only capitalize on that popularity in selling through their own DTC channels but also through wholesale.
"We've grown wholesale very methodically and carefully. Our wholesale partners are begging us for more product — begging," Kossow said. "Joe and the team have held back because we recognize the importance of building a balanced brand through those three channels and still continuing to own the customer relationship. Even if someone goes to buy our clothes at Nordstrom or REI, I think it's still very tied strongly to the Vuori brand."
A growing market
Athleisure — the concept of clothing that can be worn both for active and more casual pursuits without sacrificing style — has been a dominant trend in the athletics segment for years. Top brands have increasingly adapted their offerings to include more streetwear and lifestyle-focused items to capture shifting consumer preferences and, especially in recent years, to capture more of the women's market.
On, as one example, has experienced that shift, noting when it filed to go public that "a broader set of consumers [have adopted] On's products in their everyday lives," and not just for performance. The company is leaning into that by "creating performance products for an active lifestyle and exploration of nature and trails."
The surging popularity of activewear, and the propensity of customers to wear it as part of their everyday wardrobe, has meant a lot more companies entering the market outside of just DTC brands. Target in January 2020 launched its own activewear private label (which hit $1 billion in its first year), Kohl's followed suit later that year and J.C. Penney in January last year revamped its activewear line in a bid to strengthen its merchandise assortment.
"I think that fashion brands recognize that activewear remains a very hot category and a very hot activity, so I think more and more brands want to try to get into it. You're seeing products that traditionally, you would not have thought would have anything to do with activewear now starting to have activewear attributes," Matt Powell, senior industry adviser for sports with the NPD Group, said. "Think about all the stretch denim that's out there today and antimicrobial denim that's out there and even stretch dress shirts, stretch suits: Products that you would not consider having anything to do with athleticwear are adding athletic attributes because that's what the consumer likes, that's what the consumer wants."
In footwear, Powell said the athleisure trend is so strong that the sports side of the business is now much larger than fashion footwear as a category. In apparel more generally, fashion is still larger than activewear, but activewear is growing faster. The strength of the category has led many brands to launch into the space hoping to take advantage of its popularity, but success is not a given.
"The law of large numbers hasn't really hit Lulu yet."
Managing Partner at Norwest Venture Partners
"Many of them didn't know how to make activewear and the product really wasn't right, and a lot of those brands have gone by the wayside," Powell said. "But I think athleisure activewear still has a real hold on the consumer's mind. And I think that's why you see more of these brands getting into it."
Overall, the prospects for DTC activewear brands are good, according to Powell, but execution has varied from company to company. Outdoor Voices is often cited as a DTC brand that gained rapid popularity before running into operational problems it's still trying to solve, and Kossow highlighted Sweaty Betty as another brand that's faced challenges. Powell pointed to Athleta at Gap as a slightly different story of a brand that needed some time before it became a growth driver, but is now incredibly successful at the apparel company.
To Kossow, having a balanced approach that includes e-commerce, retail and wholesale is important, as it brings down customer acquisition costs for brands. He looks to Lululemon as an indicator of growth opportunity in the space, which has about 55% to 60% gross margins and around 19% to 20% operating margins, per Kossow. The company in its latest quarter made $1.5 billion in revenue, and Kossow noted it's still growing 25% to 30% a year, even as a global brand.
"The law of large numbers hasn't really hit Lulu yet and that brand still sees enormous international growth potential. And Lulu trades at a $50 billion market cap, so almost 10 times revenue," Kossow said. "Those are all numbers, I think, that support a large market opportunity for up-and-coming brands where you might not necessarily even be taking market share from Lulu, from Nike, from Under Armour, but creating whitespace and kind of new opportunity as the overall market grows."
The popularity of the sector is reshaping how those traditional players think about their place in the market as well. Nike, Under Armour and Adidas have all made it a priority to shift more sales to DTC channels, and sports equipment brand Wilson in 2021 opened its first stores and debuted an apparel line to take advantage of its brand recognition.
"I think, in general, with any large market when you have a number of incumbents that have been around for a long time, you have up-and-coming brands that look to knock them off and attack the soft underbelly," Kossow said, noting how big some of the top brands in athletics have become. "If you're a burgeoning brand and, you know, one of the key things entrepreneurs look for is a large market opportunity to attack, it makes logical sense that you'd see a number of different brands try to go after it."
One need only look to the acquirers to see what kind of value the sector holds. In acquiring Beyond Yoga, Levi's CEO Chip Bergh said the brand would give it a "presence in the fast-growing activewear segment with a brand with tremendous growth potential." Likewise, Wolverine World Wide CEO Blake Krueger praised Sweaty Betty for giving it "a leadership position in the growing women's activewear category."
That last point may be particularly relevant. Although DTC brands are entering the athletics market to cater to a variety of demographics, the sector's biggest retailers are leaving their share on the table when it comes to the women's business. The largest brands, like Nike, Adidas and Under Armour, have "continued to fail female athletes" and hold a much smaller percentage of sales in women's activewear than men's, according to Powell.
"If you think about brands like Lulu and Athleta, Title Nine, and even some of the smaller names like Sweaty Betty and so forth, they really have a strong, strong foothold on the women's side of the business because the traditional athletic brands just have not been able to figure that out," Powell said.
According to him, the women's business should be at least equal to the size of the men's business, which could mean "virtually a 50% increase in the women's business overall."
That's not all of the white space available, though. Another opportunity DTC brands are cashing in on is the view of activewear as more of an upscale, higher-priced item. Lululemon, Vuori and Outdoor Voices all, for example, offer leggings that cost upwards of $80 a pair. A lot of consumers may not be able to afford those prices, but they've become much more of a norm for those who can.
"Sports has always been an aspirational and inspirational business. We go out and buy a new piece of equipment cause we think it's going to help us play the game better."
Senior Industry Adviser for Sports with the NPD Group
Will customers ever tire of paying that much for athleisure? Kossow doesn't think so.
"I think in general, the genie's left the bottle. I think it's kind of hard to put it back in once you realize that you can have these more versatile, better-looking, more durable fabrics. I don't know why consumers would want to go back," Kossow said. "Now, in an inflationary environment, if people have less disposable income and maybe have to pull back in general on such purchases, that might be something that would drive it but I don't think from a consumer behavior perspective, I would foresee any change. I think, quite frankly, more the opposite."
With Vuori, Kossow is banking on it. Part of what Norwest found compelling about the brand is that a customer could get drawn in by activewear and eventually move into other categories. The company now makes dress pants out of comfortable apparel, for example, and has commute and travel-specific products. He cautioned against DTC brands moving too fast to expand into new categories, though, saying the stakes are high if a company puts out a poor product and loses some of the consumer's trust.
Execution aside, the athletics space still holds big opportunities for DTC brands, and probably will while shoppers still aspire to be healthy.
"Sports has always been an aspirational and inspirational business. We go out and buy a new piece of equipment because we think it's going to help us play the game better. We buy activewear because we want to get fit, or we want to lose 10 pounds. And so to be an athletic brand and carry somewhat of an aspirational price point as well — it seems like a logical conclusion," Powell said. "And there's a little conspicuous consumption part of this as well. If I've got a top on with a Lulu logo on it, people know that I probably spend more than they do on their activewear so I think that conspicuous consumption always comes into play here as well."