Athletic-wear companies had a strong recovery from the Great Recession, with growing markets like running providing new revenue streams for firms to tap as they appeal to the global consumer. The two biggest athletic footwear companies in the world, NIKE, Inc. (NYSE:NKE) and adidas AG (ADR) (OTCMKTS:ADDYY), are in a long-term struggle for dominance internationally. Under Armour Inc (NYSE:UA) may be a dark horse contender, given its growth prospects.
I view NIKE, Inc. (NYSE:NKE) as the safest investment, with Under Armour Inc (NYSE:UA) an excellent secondary investment. I think adidas AG (ADR) (OTCMKTS:ADDYY) is worth a look as well, but I am less confident in its ability to provide investors with great returns.
Established market leader
Mixed news on revenue
Revenue grew 18% last quarter for North America, which drove NIKE, Inc. (NYSE:NKE)’s 9% revenue growth for fourth quarter 2013. Western Europe reported an 8% gain, while revenue from Eastern Europe grew by 13%.
The Japan and China segments reported revenue declines of 6% and 10%, respectively. While it’s great to see NIKE, Inc. (NYSE:NKE) growing revenue in North America (and in Europe, despite the continuing economic malaise), those markets are comparably saturated. The American and European economies also don’t have the growth potential of China – growth potential that will drive revenue for whatever company can harness mass appeal.
Critical investments
Under Armour Inc (NYSE:UA) reported a first quarter 2013 revenue increase of 23% year-over-year, with gross margin expanding slightly to 45.9%. The EPS fell to $0.07 from $0.14 year-over-year, due to a combination of a higher tax rate (just shy of 40%) and SG&A costs (primarily driven by higher spending in product innovation and marketing).
Normally, I would view an EPS decline combined with a revenue increase as a very bad sign – the company is bringing in more money but profiting less from it – but the increased spending involves investments critical to the firm’s future. In branded sportswear, brand is the reason people pay a premium for Under Armour Inc (NYSE:UA) – and product innovation will keep the company on the cutting edge. Management has shown the discipline and vision to sacrifice short-term profitability for a longer-term outlook, and, with very little debt on its books, the company can afford that trade-off.
Strengthening the brand
Management is making smart investments in the future with the Under Armour Inc (NYSE:UA) brand “holidays,” which feature a strong push for Under Armour apparel during three days of the year. These days will be when Under Armour’s “brand voice is bigger and louder than in any other part of the year,” according to CEO Ken Plank. The “I Will” campaign emphasizes Under Armour’s technological focus and is the largest (and first global) media buy in the company’s history. These are the sorts of moves that the company needs to make to keep building its brand and market share worldwide.
A long runway for growth
Unlike NIKE, Inc. (NYSE:NKE), which must expand outside the US (it currently has over half of the US’ footwear market share), Under Armour has lots of room for growth, with a little under 2% of market share. Given that Under Armour Inc (NYSE:UA) is relatively new – and has consistently grown its market share in each of the last three years – I’m a lot more bullish on its chances for growth in the US compared to adidas AG (ADR) (OTCMKTS:ADDYY), which has 4.4% of US market share but hasn’t shown the same kind of sustained growth in the US.
A good first quarter
adidas AG (ADR) (OTCMKTS:ADDYY) reported a revenue increase of 1% for first quarter 2013, with double-digit gains in Latin America (12%), solid single-digit growth in China (6%) and North America (3%), and declines in Western Europe (6% – primarily due to losses in Southern Europe) and other Asian markets (4%). Reebok improved its margins, and most of the individual product lines (basketball, outdoor, and the like) saw sales increases.
The running market
adidas AG (ADR) (OTCMKTS:ADDYY) is branded well as a European sports shoe, but it has struggled more in the running category compared to NIKE, Inc. (NYSE:NKE). Given that running is a $15-billion market with strong growth (13% in 2011), that’s where Adidas needs to focus its efforts – and that is precisely what management is doing. Running revenue increased 12% for first quarter 2013, due in large part to the new Energy Boost brand – which won a number of awards and which management clearly views as a game changer. Initial reviews are very positive.
Valuation
For Under Armour Inc (NYSE:UA), the P/E for the trailing-12 months is a very pricey 53.8, and even on a forward basis the ratio is 33.9 – this is not a cheap stock. Given its growth prospects, these numbers seem about right, although the stock is currently a bit too expensive for me. adidas AG (ADR) (OTCMKTS:ADDYY) sits at a P/E of 32.7 for the trailing-12 months, with a forward P/E of 5.8 per Morningstar. NIKE, Inc. (NYSE:NKE)’s P/E ratio is 24.7 for the trailing-12 months and 18.2 on a forward basis.
Foolish conclusion
All three of these companies are worth an investment, based on your investing style and thesis. Under Armour Inc (NYSE:UA) has the best growth prospects, and an aggressive investor with a long-term focus will accept the high valuation for the expected long-term return. NIKE, Inc. (NYSE:NKE) is another great long-term hold, with an entrenched position and plenty of cash to fund marketing and innovation.
With adidas AG (ADR) (OTCMKTS:ADDYY), the major question is whether the Energy Boost is as big of a game changer as management believes it to be. If it represents a significant breakthrough, then sales of the shoes will continue skyrocketing and the company has tremendous growth prospects as it moves into the running market. If not, the company is still in good shape – but with lesser growth prospects than Under Armour Inc (NYSE:UA)and a position less entrenched than NIKE, Inc. (NYSE:NKE). Personally, my money’s on Nike for the long haul – it’s the safest of the three.
Michael Douglass has no position in any stocks mentioned. The Motley Fool recommends Nike and Under Armour. The Motley Fool owns shares of Nike and Under Armour.
The article Buy These Athletic Footwear Companies originally appeared on Fool.com.
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