The sports apparel industry suffered mightily in 2016. Whether we’re talking about Under Armour Inc (NYSE:UAA,NYSE:UA), the contender, or Nike Inc (NYSE:NKE), the champion, both UA stock and NKE stock delivered disappointing performance for their respective shareholders this past year. Under Armour stock, now known as UAA stock, is down 26% year-to-date; Nike stock is down 16%.
The bankruptcy of Sports Authority hit both companies and other similar retail stocks hard, but not enough to produce returns that are diametrically opposed to the S&P 500, which looks ready to deliver double-digit returns for the fourth year out of the last five.
Both UA stock and NKE just didn’t do it in 2016. Now the question on investors’ minds is which stock will bring the goods in 2017.
Is Under Armour Stock the One to Own in 2017?
While Nike is certainly the focus of Kevin Plank and the rest of Under Armour’s management, both companies can ill afford to forget about Adidas AG (ADR) (OTCMKTS:ADDYY) whose resurgence has seen the German footwear and apparel giant overtake UA as the No.2 seller in the U.S. behind Nike.
As I suggested in late October, this could actually be a good thing for Under Armour stock because it will remind the company that if it wants to grow its overall business, it needs to keep developing products such as athleisure wear that all consumers can wear and not just your hardcore athletic customer.
In September, it introduced a high-end fashion line during New York’s Fashion Week. Known as Under Armour Sportswear or UAS; it’s unlike anything it has ever produced before with wild colors and crazy looks that are decidedly “un-athletic” in appearance.
“This is the first collection, and it would be foolish and a disservice to the strategy to say, ‘We did it,'” said Ben Pruess, Under Armour’s senior vice president of sportswear. “This is one of what will be maybe 50 collections in my tenure. It’s an iterative process we will continue to refine and refine.”
Those holding UA stock should be thrilled to hear it has gone beyond its jock stereotype because that’s where the profits lie. Kevin Plank estimates that sportswear is a $13 billion business with Nike holding the lion’s share at $6.6 billion, more than Under Armour’s annual revenue.
If UA executive creative director Tim Coppens can hit a home run with this part of its business, you can be sure it won’t be No.3 in the U.S. for very long.
In October, when Under Armour announced its Q3 2016 earnings, Plank and company hammered home the point that it’s taking a hit on operating margins over the next two years (gross margins to remain flat) as it invests in its direct-to-consumer business, both online and brick-and-mortar.
“[UA] getting big fast, making retail a core competency, and getting more shoes on feet,” said Plank on its Q3 2016 conference call. “We’re not saying we’re losing money … we’re moving and marching forward.”
Kevin Plank has done a masterful job for UA stock up to this point, but now comes the heavy lifting with both Nike and Adidas fully aware of this so-called upstart; they’re no longer taking Under Armour for granted — if they ever did.
Is Nike Stock the One to Own in 2017?
Nike reported good Q2 2016 earnings Dec. 20 after the markets closed, but investors didn’t seem overly impressed with the news as its stock barely registered in positive territory in the next day’s trading. The positives of the report:
- Revenues increased 8% excluding currency;
- Return on invested capital was 31.3%;
- Earnings-per-share increased 11%;
- Nike’s 28th consecutive quarter of growth;
- Its direct-to-consumer business grew 23% including 46% growth for Nike.com;
- Western Europe and China each saw apparel sales increase by more than 20% excluding currency;
- China’s overall revenues for the quarter were up 17% excluding currency and went over $1 billion for the first time;
- North America accounted for 73.1% of Nike’s EBIT earnings;
- Emerging markets saw footwear sales excluding currency increase by 15%; and
- It repurchased 17 million shares during the quarter at an average price of $52.94, which is fairly close to NKE stock’s low for the quarter.
The negatives of the report:
- Gross margins and operating margins were down 140 and 270 basis points respectively to 44.2% and 30.6% respectively;
- Its profits outside of North America as a percentage of its overall profits declined 280 basis points to 70.3%;
- Its tax rate increased by 530 basis points to 24.4%;
- Future orders in North America were down 4%.
The bottom line is that Nike continues to be confident in its business and Trevor Edwards, its president said as much in its Q2 2016 conference call.
“[W]e’re seeing incredible momentum in basketball, to be clear basketball is back,” Edwards told analysts. “Second, we have made tremendous progress aligning supply and demand in North America, returning this important geography to a pull market. And third, we continue to see strong and steady momentum in greater China as we invest in that market to fuel growth.”
Add to this the continued strength of its direct-to-consumer business and the margin issues become less of a concern as we move into 2017.
Bottom Line on UA Stock Vs NKE Stock
It’s a tough choice, but with Under Armour making a big bet on retail, one that won’t play out for at least a couple of years, and Nike finally realizing it can do so much more with its own direct-to-consumer business, I have to go with NKE stock — at least until it becomes clear UA stock is on the right track with its DTC.
For 2017, I’d go with Nike stock; in 2018, if enough data is available regarding its DTC initiatives, I’d reconsider Under Armour stock at that time.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
