Under Armour Inc (UA) vs. Nike Inc (NKE): These 3 Stats Tell it All

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It would be an understatement to say that Under Armour Inc (NYSE:UA, NYSE:UAA) and Nike Inc (NYSE:NKE) both had a poor year in 2016, with the Sports Authority bankruptcy casting a pall over the entire sporting goods industry.

Under Armour Inc (UA)

But, as they say in life, you have to get up, dust yourself off and try again.

Business Is Still Healthy

Investors in UA stock and NKE stock need to realize that the sporting goods industry has, historically, experienced very consistent growth; according to Macquarie Securities, the global sporting goods industry, which generates an estimated $351 billion in annual revenue, grew 4.3% per year between 2005 and 2014, 50% faster than the entire consumer sector.

Over the next four years, Macquarie estimates that annual sales will grow by at least 4%, possibly as high as 5.6%, delivering better growth than the previous decade. Equally important, it sees profit margins increasing through supply chain efficiencies and product innovation.

“The key risks are firstly macro-related, and you have high foreign-exchange volatility,” Macquarie Securities consumer goods analyst Andreas Inderst said. “Nevertheless, Macquarie’s overall view of the industry has a much more positive tone. It’s a very healthy industry with very exciting product innovation.”

Too Many Stores

What happened to Sports Authority in 2016 had little to do with the sporting goods industry and everything to do with supersaturated retail.

“Excess store growth has been one of our key concerns, with growth accelerating over the last couple of years,” Credit Suisse said in an April 2016 note to clients, right around the time Sports Authority and Eastern Mountain Sports entered bankruptcy.

Credit Suisse’s estimate said there were 13,400 sports-related chain stores in 2015, 11% more than four years earlier.

Howard Schultz, CEO of Starbucks Corporation (NASDAQ:SBUX), gave his investors a dose of reality in December when discussing the state of retail.

“We’re going to see a very major downturn in the fact that the country is over-retailed in lots of categories,” Schultz said at the Starbucks December Investor Day presentation. “We’re going to see significant, major brands — as we’ve seen already — not open many stores as they have in the past and it’s the beginning of lots of companies announcing store closures.”

Simply put, there are too many sporting goods stores in America.

Direct-to-Consumer

Nike and Under Armour will both get the business lost from Sports Authority’s demise back through both their own retail stores and online.

Under Armour’s direct-to-consumer revenue in Q3 2016 grew 29% year over year to $408 million, which comprised 27.7% of UA’s overall revenue. It finished the quarter with 145 Factory House stores in North America and 32 internationally, and 17 Brand House stores in North America and 31 internationally.

Go back through its four quarters in 2015 and you’ll see that UA direct-to-consumer business was $1.2 billion, or 30% of its overall revenue. In Q3 2016, as I indicated above, its direct-to-consumer business accounted for less than 28%, and in Q3 2015 that figure was 26%.

The margins at UA’s direct-to-consumer business are higher than in the stores, so a 1%-2% increase annually in the percentage of business from this sector will help overall UA profits in the long run.

Over at Nike, its direct-to-consumer business in its latest quarter (Q2 2016) was $2.1 billion, or 27.8% of overall revenue. For the first six months of fiscal 2016, its DTC business generated $4.4 billion, or 27.5% of overall revenue.

Bottom Line on UA Stock

I recommended in December that investors choosing between UA stock and NKE stock go with Nike until Under Armour gets its direct-to-consumer business on track.

However, looking more closely at the numbers above, it’s fair to say that Under Armour is holding its own when it comes to direct-to-consumer.

Aggressive investors might want to take a second look at UA stock. The upside, in my opinion, is much greater than the downside. The numbers don’t lie.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


Article printed from InvestorPlace Media, https://investorplace.com/2017/01/under-armour-inc-ua-stock-nike-nke-3-stats/.

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