Skechers (SKX) and Under Armour (UA) have been two of the best-performing apparel/retail stocks of the last few years.
Moreover, both stocks have shown an innate ability to trend against the market during its recent pullback over the last three months.
But while these two sports apparel leaders have traded along the same path up until this point, there’s a good chance that one will keep going higher whereas the other will fall.
Growth Increases Apace for SKX
The chart below might be the absolute best illustration of fundamental performance you’ll find with regard to Under Armour and Skechers. What you see is how Under Armour’s year-over-year revenue growth far exceeded that of Skechers, back in 2013 and early 2014.
However, Skechers’ growth rate has actually increased as it grew larger, whereas Under Armour’s year-over-year growth has declined.
In general, year-over-year growth should decelerate as a company grows larger. Skechers is just a rare case of a company whose marketing initiatives and new product categories were well aligned, which thereby caused a surge in consumer demand.
While Under Armour continues to grow nicely, Skechers has clearly surpassed UA. Therefore, with the two businesses being of similar size, having very similar operating margins and operating in the same industry, one could make a strong case that SKX is worth the same — if not higher — valuation multiples than UA.
Click to Enlarge Yet oddly, Skechers trades at a far more conservative forward price-to-earnings ratio than Under Armour. And when I say far more conservative, I’m saying that Under Armour’s multiple is more than 220% greater than SKX.
Given the growth disconnect in favor of SKX, one can conclude that there is a serious problem with the way that these two companies are valued.
With that said, it is not uncommon for the market to misvalue a company in the short term, but long-term, the market usually gets it right. The problem is that 22 times next year’s earnings is too cheap for a company growing at the rate of SKX whereas 72 times next year’s earnings is too expensive for a company like UA. Thus, the two stocks will likely meet somewhere in the middle long-term.
In further support of this notion is each company’s respective business model.
Skechers has some of the hottest shoes in the market today, thriving in important categories like women, children, running and walking. These are categories that require the new purchase of footwear on an annual or bi-annual basis, thereby suggesting that Skechers’ growth is here to stay.
Meanwhile, while it’s making inroads into other sports, such as the NFL, Under Armour has yet to really penetrate the basketball shoe arena, having key endorsement deals with Stephen Curry but missing its opportunity with Kevin Durant. If UA could penetrate that space, it might have a better shot at longevity, but currently, much of UA’s growth comes from demand with adolescents and children with actual clothing.
Bottom Line
As we saw with the likes of American Eagle (AEO) and even Michael Kors (KORS), being a trendy retailer/designer can work for a while, but it is a fickle business long-term. In other words, UA needs to penetrate those more consistent businesses like footwear or women’s apparel on a larger scale.
Nonetheless, the actual business models of these two companies all but support my notion that SKX has much to gain while UA has much to lose. With a $22 billion market capitalization, UA can’t support 70x forward earnings forever. Therefore, the bottom line is to buy SKX and take profits in UA.
As of this writing, Brian Nichols owned shares of Skechers USA and Michael Kors.
