As investors continue to watch Baltimore-based Under Armour Inc (NYSE:UA, NYSE:UAA) struggle to reignite its growth engine, we’re faced with the very real possibility that UAA stock might take a back seat to Skechers USA Inc (NYSE:SKX).
You read that right.
I will forever associate Skechers with the word “sketchy,” a less-than-flattering description of someone disreputable. Don’t ask me how or why I came to this conclusion many years ago because I honestly can’t explain it.
Suffice to say, I’ve missed out on some profits over the years as a result.
My loss.
SKX is the same company behind the now infamous Shape-Ups toning shoes made popular by Kim Kardashian that had customers believing they could tone their thighs and behinds just by walking outdoors.
Subject to a class-action lawsuit filed in 2012, Skechers settled with the Federal Trade Commission in 2013 and agreed to pay $40 million to compensate the roughly 520,000 consumers who bought a pair.
But, that was then.
Skechers Today
The California company reported first-quarter earnings April 21 that beat analyst estimates. Revenue increased 9.6% to $1.1 billion with earnings per share of 60 cents, 5 cents better than analyst expectations. More importantly, SKX managed to put an end to three quarters of negative earnings surprises.
“In 2005, we surpassed $1 billion in annual sales, and now less than 12 years later, we had our first $1 billion plus in quarterly sales,” CEO Robert Greenberg stated in its Q1 2017 press release. “We look very good from a product standpoint.”
For all its warts, Skechers is one of the most resilient publicly traded companies I have ever encountered. Every time you think it’s on the ropes (Shape-Ups), it bounces back with some celebrity endorsement to get it back in the good books of consumers — and more importantly, investors.
In the past five years, SKX stock has outperformed UAA stock in four of those years; Skechers has achieved an annualized total return of 32.6% over the previous five years through May 2, compared to 11.5% for UAA. In 2013, when Under Armour outperformed Skechers, it was by less than one percentage point — 79.9% versus 79.1% — hardly a ringing endorsement of UAA stock.
So far in 2017, despite its Q1 beat, Skechers stock has underperformed the S&P 500. Again, it’s very resilient, so I expect SKX stock to go on a run at some point over the remaining eight months of the year.
InvestorPlace contributor Luke Longo called SKX stock a “screaming buy” days before its first-quarter earnings, highlighting the fact that it trades at a significant discount to its peers.
“Relative to peers, SKX stock is dirt cheap,” wrote Longo. “SKX stock trades at 12.4 times next year’s consensus earnings estimate. Meanwhile, NKE stock trades at a 21.8 times forward earnings multiple, UAA stock at 36.6 times, and LULU stock at 19.6 times. That big of a discrepancy makes no sense, especially considering SKX is actually expected to grow faster than its peers.”
He’s right about the relative valuation.
At the end of the day, I like the fact that Skechers has net cash of $539 million, while Under Armour has net debt of $612 million, a difference of more than $1.1 billion. Meanwhile, Skechers generated more operating cash than Under Armour in fiscal 2016.
It’s cheaper than UAA, it generates more cash than UAA, and it outperforms UAA where it counts — in the stock market.
UAA Stock Is Not Looking Good
In mid-April, I reiterated my opinion that Under Armour should seek out a merger with Lululemon Athletica inc. (NASDAQ:LULU) because its growth story is shot; together they’d be a much stronger force to be reckoned with than apart.
Under Armour’s first-quarter report did nothing to change my mind — a 7% increase in sales combined with a one-cent loss — that it’s floundering to find its way against much stronger competition.
I used to be a fan of CEO Kevin Plank because I thought his entrepreneurial skills were extremely impressive, taking a business from his grandmother’s basement in 1996 to almost $5 billion in annual revenue. It’s a big accomplishment, but now he needs to step aside and let a professional manager run the show while he figures out the next best thing for Under Armour.
Let’s face it. Kevin Plank is no Phil Knight. That’s not a put-down, it’s a fact. While I admire his work to transform the city of Baltimore, I firmly believe he needs to become chairman and hire a quality CEO who can light a fire under the company — and UAA stock, too.
Until that happens, I’m afraid to say, Skechers is the better buy.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
