RTN - 02/16/25

January inflation and China tariffs raise concerns about the economy; Brooks Running keeps on shining; On recieves a down-grade (Elmo says uh-oh); Under Armour is knee-deep in turn-around efforts

Welcome back my nerdy-number friends! It's been a couple of weeks and man I'm glad I gave myself the grace to skip last week. 6 days in Phoenix with my family was extremely refreshing and being at a race as authentic as Black Canyon is always inspiring for the training that takes place in the cold and wet winter months. This week we'll do a quick hit on January inflation and tariff news with China. For the running companies out there, we'll look at Brooks and UA earnings and take a peek at the downgrade on On's stock. Lastly, I'll share a couple of interesting reads which include Peloton, the trail running industry, and a must-follow Substack I always enjoy reading.

Before we dive in, I do want to make a note that this community in an OPEN and LOVING one. At least that is my goal. While having 'subs-stack' up is great (albeit free 🙂) I'd love to talk with you all. Read your thoughts on this stuff. How it's impacting your work or your life. While I try to keep a running focus, a lot of stuff I share is impacting all our lives and careers. My hope is for people reading this to feel empowered and optimistic despite what seems like a never-ending news cycle of negativity, fear, and anxiety. I do get that is a rather privileged perspective, but I do believe I feel that way because I'm surrounded by such a great group of people who shine their light bright and lift each other up. So, let's do that here!

Now, on to the numbers...

Macro

• 3% ... January inflation came in at 3%, which is not what the experts were expecting and could raise some concerns about where the economy is at. Inflation is confusing, as every person or media company slices the data how they want. Excluding Food and Oil, Excluding Oil and including Food, Excluding Services, etc. etc... Core Inflation, usually described as "excluding volatile food and energy prices", rose 3.3% from a year ago. Overall inflation also grew 0.5% from December and at 3.0% was slightly higher than the expected 2.9%. The reason this causes concern is the fiscal policy that was set in early 2024 was supposed to keep brining inflation back towards 2%, and it was said that would happen in 2H of 2024. Well, now we're in 2025 and were sort of where we were a year ago.

  • The main story here is there are a lot of stories. The numbers taken alone are not great but let’s do a little education primer on rates versus inflation before we give our opinion on them. We want inflation to be around 2% and because it's been significantly higher than that for the past few years you've heard a lot of talk about rate hikes and cuts. Before all the craziness happened, inflation was "good”, and rates were very low. When inflation went to the moon, eventually the Fed raised rates to help ease inflation. When inflation started to cool, the Fed cut rates a couple of times over the past couple of years but is now currently holding. Why all this matters is that at 3%, there's still a discussion around if the Fed should raise rates in order to nudge inflation towards that 2% goal. The current communication from Mr. Powell (Chairman of the Fed) is they are in a wait-and-see approach. Back to "there are a lot of stories", if you try to unpack inflation and inflation forecasts, good luck. Right now, prices of things that cost a lot, like housing, are continuing to come down which has massive weight to overall inflation. However, things like groceries which do a lot of volume are seeing prices go through the roof. This dynamic, coupled with tariff uncertainties in the near-term, make it hard to gauge if we're sort of "stuck" at 3% annual inflation or if once we figure tariffs out and the Bird Flu goes away, we'll skip to 2% inflation a little bit quicker. Layer in Trump saying rates need cut, while members of his administration think they should be raised and Powell wants to hold, and we have pretty good soap opera my grandma would love to spend three hours telling me about. Speaking of tariffs....

• 10% ... The annoying slap on China from the ole' Trumpster. I imagine we'll circle back (no, I don't work in corporate America 🙂) to this topic many times in the coming weeks but it's worth touching on this piece of news because it sounds like it will stick (at least for a while). The tariffs will be a 10% duty on all goods imported from China, where a decent amount of running product is created. Like FDRA (Footwear Distributors & Retailers of America) points out, we will more than likely see this trickle through to the consumer as early as back-to-school as companies are finalizing order books for Summer and Fall seasons. FDRA calls out that we brought in about $10B worth of footwear from China last year, and if my 5th grade-level-math serves me well, that's about $1B dollars in extra cost that must get eaten somewhere. Whether through companies negotiating costs, shifting designs, straight up taking the hit, flowing through to the consumer with raised prices, or a combination of any and all the above. This seems like a large number but in the grand scheme of things I don't think it we'll see that large of an impact to the price of footwear in the near future. One reason is that companies have largely been diversifying outside of China for a while now, and things like the COVID-19 pandemic accelerated it. The bigger cause for concern is where else the current administration will roll-out tariffs and if we'll see a greater than 10% tariff placed on China sometime in the near future. My plan is to just stop eating and my budget will open up so much I won't care what the prices of shoes are (I'm not a doctor. Please consult your practitioner for health advice).

  • After I wrote the above bullet, Trump signed a plan outlining his plan to reciprocate tariffs placed on the US. What this means for the 10% in China is that it will more than likely increase at some point soon. One thing I'll add now that we're bringing this in is I truly believe these tariffs will be a short-term thing. To me, Trump is using this as a political tool to get what he wants in the short-term, and when he finally gets what he wants he will remove tariffs or reduce them towards the end of his term to make him seem like the professional chess player he thinks he is. I'm not saying this is the wrong approach; I just don't think the tariffs will stick longer than a couple of years. We'll just have to see if the companies who raise prices to deal with these tariffs also lower prices when/if they are dropped.

Photo Credit: Paul Mulholland

Running Industry

• 9% ... Brooks closed their Fiscal 2024 up +9% from a year ago and marks the 8th consecutive year of growth for the company. WOW. Talk about long-term healthy growth and stacking bricks each and every day. Not only that, but it also doesn’t seem like they'll be slowing down anytime soon. As a US based company, when you mature and seek continued growth (to please the pesky shareholders) one of the logical steps is to pursue global expansion into international markets. In some industries that can be difficult, running is probably a little bit easier. However, it's still not a given that this will bear fruit given the complexities of the consumer, global supply chains, operations and logistics, investment, etc... All that to say, Brooks' strong growth in '24 was highlighted by strength across Europe, where it grew two and three times the rate of performance running in France and Germany, and APLA (Asia, Pacific, Latin America), where in China specifically (the second largest running market in the world) Brooks grew +228%.

  • Where growth might be harder to come by is in the US, but their fueling strategy must be on point because there was no bonking last year. The most surprising number to me, in Q4 Brooks grew +19% in the US specialty running channel, which most of us know is the heart and sole (EL OH EL) of running here in America. And now I'll drop another WOW. Here are some other fascinating numbers and facts on Brooks' 2024 performance:

    • The Ghost and Adrenaline GTS combined for 10% of US performance running footwear retails sales

    • Brooks' HQ workforce has doubled since 2014, and they recently expanded their global headquarters deeming it the "center of the running universe"

    • On the back of their "Let's Run There" with Jeremy Renner, Brooks won multiple marketing awards including being recognized by Fast Company's "2024 Brands that Matter Awards"

    • They are now the official partner of runDisney and the official running shoe of their race series

    • Josh Kerr landed an unprecedented 10-year contract with the brand, signaling Brooks' commitment to the long-haul

    • The list goes on and on, so I'm stopping here so I can go crew at Black Canyon

• 227% ... That is the appreciation of On's stock price since November of 2022. And this is relevant because a prominent institutional investor DOWNGRADED On's stock this week. There's probably a ton of opportunity for education here, but the simplest way to explain it is that a stock is rated Buy, Sell, or Neutral (there are other ratings but just focus on these). Goldman Sachs downgraded On from "Buy" to "Neutral", essentially saying they wouldn't buy this stock, nor sell it. So, if you own the stock just hold tight and if you missed out on the rocket ship, now is not the time to jump on board. Where it can get complicated is Goldman maintained their stock price target of $57, meaning they now feel $57 is more of a fair value and don't expect the stock to appreciate more than where it's at. The commentary from the company is that the running market is hot, and the competitive landscape might just be hotter. On is leading in comfort but from a performance perspective Goldman believes the rest of the field will start to slow On's share gains or potentially even take share.

  • I don't think there's much here. Even Goldman has On pegged to grow at a 22% CAGR (compounded annual growth) over the next 4 years, which is crazy good. There are a group of leading investors who like to mix things up and stir some drama, and I think that's a little bit of what is going on here. On's performance innovation is on par with all the other lead players right now and I personally remain rather bullish on the company. The rest of the market also seemed to scoff at this news as their stock price closed relatively flat the day this was released and if it spooked others, we would see their stock fall driven by some sort of sell-off. "Opinions are like farts. Everyone has them. No one wants to hear anyone else's. And most of them stink. Except mine. Mine smell like roses." Carry on...

Photo Credit: Brooks

• -6% ... Under Armour released Q3 earnings a couple weeks back and exceeded expectations despite landing down -6% from a year earlier. The main focus here is on their North America business which landed -8% vs PY but marking their third consecutive quarter beating expectations. Maybe more important is their sequential improvement in NA with Q2 coming in -13% and Q3 in the prior year landing -12% from the year prior. While that all seems positive despite negative growth, the main callout here is Under Armour was unwilling to commit to a time frame they expect North America to return to growth. This coupled with consistently exceeding expectations leads one to believe that UA is following the safer tactic of under-promising and over-delivering. Not a bad strategy, but after too long investors will start to get impatient if they sense UA is sand bagging and not being as transparent as they probably should be.

  • The rest of the details seem like a pretty standard case of a company playing the long game and doing things right to turn the business around. UA has decreased their reliance on heavy promotions, increasing AURs and AOVs. They're moving away from a largely performance marketing driven offense and getting back to telling stories and being anchored by brand marketing while leveraging their strong athlete portfolio. Lastly, their revamping how they think about wholesale partnerships and doubling down on what they call "better" and "best" partners instead of relying predominantly on "good" accounts. The one issue here is that the marketplace is as competitive as it's ever been and the companies offering the best products with the best terms and partner investments are getting the shelf space. Time will tell if their new products are "cool" enough and their brand stories resonate enough to "protect their house".

  • The last piece here, no real mention of running. What we did learn is they are reorienting their strategy and org. structure to be led by sport categories instead of product engines (i.e., footwear, apparel, accessories). I'm not sure what the second layer of hierarchy under product engine was but I don't think this will change much for them. Yes, a company wants clean and well put together head-to-toe concepts, but I'm not sure that was their issue to begin with. What's a little disheartening to me (if I were a shareholder) is their most innovative running shoe in recent memory was a collab with another brand, Speedland. I'm not sure I'm even aware of another prominent running company doing something like this (fill me in if so!) but to me it says they lack faith in their own innovation and product creation teams.

Photo Credit: Arune Singh & Drew Whitcomb (Weartesters)

Interesting Reads

• I've been digging Daniel-Yaw Miller's Sportsverse Substack since the moment I found it. I'm not the biggest pop-culture nerd in the group but his perfect blend of fashion, sports, and culture help keep me up to speed while being interesting enough to digest. His post from last week, "How Running Culture Reached Hip-Hop", provides more evidence (that we didn't necessarily need) of how big running’s "moment" is. One thought I'm stuck on is the uniqueness of running culture. We have this phenomenon where "run-clubs are the new nightclubs", and I totally agree. But night-clubs have tiers to them that require differing levels of money, status, and access. Daniel highlights some recent examples of hip-hop artists sprinting into the running world and all I can picture is there being a 'money, status, or access' barrier for the "normal" runner to participate. It doesn't seem that way. These larger-than-life celebrities are running right along with Mary Lou who is a cashier at Trader Joes. That is why running is unique. There's a bond that brings all classes (and economic classes) of society together into one melting pot. I'm not sure where else this is happening but it's fascinating to me and I love to see it!

• I came across this very in-depth report on the State of Trail Running on LinkedIn this week. I transparently haven't had a ton of time to dig through the whopping 108 slides and it is open on my browser so I don't forget about it. The report was put together by two gentlemen I don't know but seem to have a high level of professional experience in analyzing industries via investing, advising and consulting, and business analysis. The report itself digs into the overall market size of trail running and then starts to double-click (I said it again) into where trail runners are, what they spend their money on, and how that looks as we move into the future. My ask to you all, if you read it, let me know your thoughts and what you found to be the most interesting takeaway!

• While this could probably sit in the running industry section, I'm dropping it here, but Peloton released earnings recently and they were rather surprising. Peloton has been struggling ever since their boom during the pandemic, and they're definitely not thriving now but they do seem to have some momentum in some pockets of their business. Why their earnings are interesting to me and potentially this group is the success they are having is being driven by the sale of their treadmills. To my knowledge, they are one of the best options for an interactive running experience, and as the "running boom" continues I'm curious how many runners will continue jumping on board. The proposition is intriguing for a lot of runners, who of course can afford the tread and the subscription fees and makes me wonder how far into this space they'll continue to go. Will we see more professional runners or running influencers jump on the train and coach some running classes? Will Peloton jump into a broader partnership with a running brand? I'd say yes to both but I guess time will tell!

That's it for this week. We'll see if I get one out next weekend or if I stick to bi-weekly for a little while. I do need to land a plan, but with a career move that's been exciting and demanding, this has purely been for fun and I'm not even sure what the long game is. Regardless, I'll be here running the numbers and doing my best to make finance and economics a little more enjoyable for this amazing running community.

Much Love.

Derrick

[All views are my own and not that of my employer, Nike, Inc.]