Brand strength is key to weathering consumer slowdown — UBS

Among softlines players, brand recognition often represents their greatest competitive advantage, with those demonstrating strong momentum most likely to outperform in a constrained consumer climate

Against that backdrop, UBS analyst Jay Sole analyzes softlines companies to highlight the link between top-line growth and investment in brand building.

Sportswear is the best example of how a strong brand translates into sales momentum. Take, for example, On Holdings (NYSE:ONON), one of the fastest growing footwear brands. On’s (NYSE:ONON) marketing spend as a percentage of retail-adjusted sales in 2024 was 8.6%, the highest among its peers.

While for Nike (NYSE:NKE), which used to spend ~7% of retail-adjusted sales on marketing, cutting back to the low 6% range could explain Nike’s (NYSE:NKE) decelerating sales growth rate. And while new CEO Elliott Hill sees the benefits of increased brand investment, the company has yet to return ad spending to ensure top-line growth.

And then there’s Lululemon (NASDAQ:LULU). Lululemon (NASDAQ:LULU) spends just 5.1% of retail-adjusted sales on marketing. The company built its business by word-of-mouth through its “ambassador strategy.” As the company grew, it needed to adjust its marketing to more traditional methods, but has only increased its marketing spending as a percentage of retail sales to 5.1% in 2024 from 4.5% in 2023, which more closely aligns with department stores’ ad spending.

“Our view is LULU may need to raise its marketing spend to a level more in-line with its peers to return to stronger U.S. sales growth rates,” Sole notes.

Looking at the entire retail sector, Sole’s data shows minimal marketing spending from names like Burlington (NYSE:BURL), TJX Companies (NYSE:TJX), and Ross Stores (NASDAQ:ROST), the three of which derive little benefit from increased marketing as their value derives from their value proposition.

“Value-for-money” is the main off-price shopper purchase driver,” Sole says.

While at the other end of the spectrum is The RealReal (NASDAQ:REAL), Revolve (NYSE:RVLV), Tapestry (NYSE:TPR), and Signet (NYSE:SIG), with Signet’s (NYSE:SIG) ad spending “beginning to pay off.”

For the others, increased spending doesn’t always translate into profits. Looking at the relationship between profit and marketing, Revolve (NYSE:RVLV) and The RealReal (NASDAQ:REAL) spend the most but get very little bang for their buck, compared to Boot Barn (NYSE:BOOT), Crocs (NASDAQ:CROX), Abercrombie & Fitch (NYSE:ANF), and On Holdings (NYSE:ONON) where the reverse is true.