ROTH Capital Partners recently initiated Equity Research coverage of the Active Lifestyle Retail & Consumer Products sector with a specific focus on the Action Sports category. I initiated coverage of Tilly’s and Skullcandy, while assuming coverage of Zumiez, Quiksilver, and Pacific Sunwear. Here are some of my thoughts on the industry.
Action sports have achieved mainstream appeal over the last two decades, helped by the launch of the X Games in the mid-1990s, snowboarding’s introduction and subsequent new events at the Winter Olympics in 1998 and 2006, and the addition of BMX at 2008’s Summer Games.
Meanwhile, the X Games have gone from ESPN2 to primetime ABC. These events provide significant global exposure for emerging brands and retailers, in an area where only larger athletic brands have participated historically.
Action sports are aspirational, and consumers of the category’s brands are not necessarily participants in the sports themselves. They identify with a lifestyle very different from that of more traditional organized sports, one that crosses age barriers with people expressing individuality in efforts to fit in.
Although we see signs the category is maturing, it continues to grow and we believe sales growth is outpacing that of broader retail.
Action sports continue to garner more widespread adoption across gender, ethnicities, and international borders. Category brands seem to resonate across gender and ethnicities in Southern California, and we see an opportunity for similar success across the United States, helped in part by growth in streetscape crossover brands.
Internationally, Europe has an existing affinity toward action sports, but parts of the region remain fairly underpenetrated. We also see potential for significant growth in Latin America and China.
We expect growth in skate and snow brands to outpace surf, given greater relevance in parts of the world lacking access to water, and enthusiasts who tend to be more brand-loyal. The rising popularity of motocross and other newer action sports should help to support this growth.
In evaluating different action sports industry stocks, we see retailers like Zumiez (ZUMZ, Neutral, $34.92) and Tilly’s (TLYS, Buy, $16.76) as the greatest beneficiaries of continued growth in the category. Both offer a broad and unique product offering, and are more immune to the brand cycles that naturally exist within the industry.
Zumiez is positioned for significant growth online and internationally, while Tilly’s already has the infrastructure in place to support a much larger domestic footprint.
Skullcandy (SKUL, Buy, $14.00) should continue to benefit from growth in action sports as well as increased consumption of mobile media on smartphones and tablets. SKUL shares are undervalued in our view, given investors concerns that on-ear and over-ear headphones are a fad.
Quiksilver (ZQK, Neutral, $2.20) and PacSun (PSUN, Neutral, $1.83) shares also look cheap, but we rate them at Neutral given limited visibility into success with ongoing turnarounds.
Dave King is a Senior Research Analyst at ROTH Capital Partners, a full service investment bank based in Newport Beach, CA.
