The Strategist

Nike vs. Under Armour: An investor's choice


07/11/2017 - 08:41



Investors often compare Nike and Under Armour as these two compete in the segment of sportswear, footwear and accessories. Today, however, both manufacturers are experiencing completely different stages of development of their business. And the quotes show this perfectly: since the beginning of the year, Under Armor’s securities have fallen in price by 24%, while Nike’s shares have added 14%. So, what are the differences between companies and what Impact is it having on their shares?



Austin Kirk via flickr
Austin Kirk via flickr
Under Armour

First of all, decline in Under Armour’s shares is explained by recent fall in results in the North American division, where revenue from the previous quarter was down 1%. At the same time, it accounts for 80% of the company's total sales of $ 1.1 billion.

Under Armour, in particular, explains the negative trend of bankruptcies of retail chains in recent times. New partnership agreements with companies such as Kohl's are not yet able to compensate for the reduction in retail space. As a result, Under Armour's quarter revenue increased by only 6.6% in annual terms, for the first time in 10 years, falling below the level of 10%. On the other hand, direct sales to consumers increased by 13% to $ 302 million.

The company’s foreign business is developing at a rapid pace: revenue outside of North America jumped 52% (57% in constant currency) over the year, and its share in total sales increased from 14% to 20%. At the end of last year, the company launched Under Armour Sportswear brand, entering the 12.5-billion-dollar market of athletic apparel. Currently, it is responsible for about a quarter of Nike's total sales and provides excellent opportunities for development. 

Last month, Under Armour’s shares went up by 14% thanks to the excellent performance of Steph Curry, the company’s "face", in the final of the NBA championship. Moreover, more recently, Patrik Frisk, who previously worked for VF Corp., became President and Chief Operating Officer of the company. This is expected to somewhat weaken the rigid grasp of the founder and CEO Kevin Plank. Susquehanna’s analyst Sam Poser believes that this step will "finally decentralize adoption of certain decisions within the Under Armor" and, possibly, will lead to a long overdue revision of the global growth strategy.

Nike

Nike’s capitalization (95 billion dollars) is almost 10 times exceeds Under Armour. Obviously, the company is more mature. Last week, Nike reported that revenue increased 5.3% year on year, to 8.68 billion, not too far behind Under Armour’s corresponding figures (although Nike is much larger). 63% of this amount, or almost $ 5.5 billion, fell on Nike shoes, which sales around the world grew by 10% in constant exchange rates. Demand for Converse footwear increased similarly, by 10% (up to 554 million), that is, the purchase of the retro footwear brand in 2003 proved to be justified.

In North America, however, Nike stands up to the same negative tendencies as Under Armour. In the last quarter, domestic sales grew insignificantly, reaching $ 3.75 billion - a 4% growth in the shoe segment was offset by a 2% decline in the clothing segment and a quarter-point drop in the sale of sports equipment (although the latter is largely due to Nike's strategic departure from the golf equipment market). In this regard, last week Nike announced a new agreement, under which a limited range of products will be presented in the online store Amazon.com.

On the one hand, this resolves long-standing conflicts between the two companies - previously Nike sought online independence from the online trading leader. On the other hand, investors are worried that Nike would lose the image of the premium brand and would not be able to maintain the appropriate level of prices for Amazon.com. However, the management assured that it is actively working to protect the brand on the largest trading Internet site. Finally, do not forget about the high return on the company's shares. Their dividend yield is 1.25%, while Nike has already purchased 79.8 million of its securities for a total amount of 4.4 billion dollars as part of a four-year 12 billion buyback program, launched in November 2015.

In the end

Eventually, not only the both companies are financially stable, but are also growing steadily. They own well-known brands and are ready to go further. However, you only need to choose one, it’s better to pay attention to Under Armour, says Steve Symington from Motley Fool. It is very likely that Nike will continue to grow further, as resources allow the company to expand into new markets in a way that Under Armour can only hope for. But over the past decade, Under Armour’s shares have repeatedly fallen and recovered. They have already begun their upward movement from multi-year lows, and there is no reason why Under Armour papers will not sooner or later reach new levels while the company develops its global presence. 

source: fool.com




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