Consumer preferences and tastes are as changeable as the weather. Apparel retailers have to come up with something new and trendy every season in order to remain in the race, as customers want to keep their wardrobes up-to-date all through the year. The U.S. apparel industry, which is one of the largest in the global market, felt the pinch when consumers curtailed their discretionary spending in fear of the economic downturn.
However, with the economy gradually making its way out of the woods, consumer confidence is once again moving north and job market conditions are steadily improving. Apparel retailers are hoping that consumers will now have more money to splurge in the New Year.
Stiff competition at the cost of margins, rise in raw material prices and cautious consumer behavior are some of the headwinds with which the industry has to grapple. Despite the odds, two stocks of the U.S. apparel industry – NIKE, Inc. NKE and Under Armour, Inc. UA – performed exceptionally well in 2015 and surged approximately 32.9% and 20.5%, respectively.
On the other hand, 2015 has been a rough year for the majority of stocks. This is evident from the S&P 500 and Dow Jones Industrial Average performances, both ending in the red for the year. Ambiguity over the timing of the rate hike, concerns about the Chinese economy and slowdown in the global markets were the major reasons which affected the stock markets in 2015.
But it remains to be seen whether Nike and Under Armour will be able to continue with their bullish run in 2016 as well. Let’s find out which of the stock is well trained to win the race this year.
Nike, Under Armour — Head to Head
Nike is a leader in the U.S. footwear and athletic apparel industry. The company’s strong portfolio of globally recognized brands including Nike, Converse, Chuck Taylor, Hurley, All Star, One Star, Star Chevron, and Jack Purcell, along with its focus on innovation has helped in further strengthening its leadership position. Nike continues to seek opportunities for increasing its global footprint, popularity and market share.
In the process, it has acquired well-known brands such as Converse, Hurley and others. The company has been increasing its popularity by acquiring contracts to supply sports-related apparel, shoes, etc., to renowned teams and sports associations.
Given its momentum, Nike has no plans to slow down anytime soon. As revealed in a recent investor meet, Nike is targeting annual revenue of $50 billion by the year 2020, representing a compounded annual growth rate of about 10%. We believe this apparel giant is capable of achieving its lofty goals. As a proof, the company has almost achieved its $36 billion revenue target for 2017, which was set in 2013. In fiscal 2015, Nike reported revenues of $30.6 billion.
Under Armour on the other hand continues to seek opportunities for increasing its global footprint and market share. Though the company generates a major portion of its revenue from the North American region, it intends to expand business operations to other parts of the world to mitigate risks stemming from concentration in one geographic region. In the process, the company has opened its factory and brand stores in Canada and China as well as given franchise licenses in many countries.
Another major tool used by Under Armour to broaden its ambit is the development of an International e-Commerce team. The company is also entering into deals with rising athletes including basketball star Stephen Curry and golfer Jordan Spieth, which will boost brand recognition and give an edge over its competitors. Taken together, these strategies will not only help in augmenting market share but also provide a competitive platform in the global sportswear retail market.
Under Armour is aggressively expanding into the technology-based fitness business. Recently, the company unveiled its state-of-the-art line of products comprising UA HealthBox, UA SpeedForm Gemini 2 Record Equipped and two models of wireless headphones at the Consumer Electronics Show in Las Vegas. With increasing consciousness about fitness, particularly among the younger generation, sports apparel makers are entering the fitness gadgets business and other tracking platforms.
Under Armour’s acquisition of MapMyFitness for $150 million in Dec 2013 was a step forward in this direction. The acquisitions of Endomondo and MyFitnessPal for $85 million and $475 million, respectively, in Feb 2015, were also in line with the company’s strategy of expanding its reach in the fitness space vertical.
Also, other companies have been making efforts to connect with customers by encouraging them on the heath quotient. One such company is DICK’S Sporting Goods Inc. DKS, which recently introduced a new ‘Move’ feature on its mobile app that allows users to connect to fitness tracking devices like MapMyRun and Fitbit Inc.’s FIT “Fitbit” to earn DICK'S ScoreCard points for realizing activity goals.
Nike, Under Armour Scorecard
|
Parameters |
Nike (Fiscal 2017) |
Under Armour (Fiscal 2016) |
|
Earnings Growth Rate |
14.70% |
28.10% |
|
EPS |
$2.44 |
$1.34 |
|
Long-term Earnings Growth Rate |
14.1% |
23.3% |
|
Sales Growth Rate |
9.7% |
25.3% |
Note: For comparison purpose fiscal 2017 has been considered for Nike’s estimates as its fiscal year ends in May.
From the above table it is evident that both the companies have clinched a solid double-digit growth rate in most categories and are looking to forge ahead in 2016. However, Under Armour looks to have a clear advantage, at least in terms of numbers.
From another perspective, Nike has a market cap of more than $104.5 billion whereas Under Armour has a market cap of $17.2 billion. We believe with Nike’s huge market cap, along with its long-term earnings growth potential of more than 14% for fiscal 2017, it looks to be well positioned. However, the catch here is that Under Armour has the advantage of being a smaller entity with more scope for market share growth.
Yet, Under Armour currently has a Zacks Rank #4 (Sell), while Nike has a Zacks Rank #3 (Hold).
In a nutshell, both stocks look promising over the long run. Right at the beginning of the year it’s a little too early to wager which of the two companies will be in an advantageous position by year end. However, for the time being you can hold on to Nike for its size and favorable Zacks Rank, while wait for a better Zacks Rank for Under Armour to accumulate positions.
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