Beaverton, Ore.-based Nike, Inc. (NKE) and Under Armour, Inc. (UAA) in Baltimore, Md., are two major companies in the athletic apparel space. NKE designs and markets athletic footwear, apparel, equipment, and accessories for men, women, and children, and sells its products to retail stores worldwide through its own stores, subsidiaries, and distributors. UAA develops, markets, and distributes branded performance apparel, footwear, and accessories made from synthetic microfibers for men, women, and youth worldwide, and sells its products through its wholesale and direct to consumer channels that include brand and factory house stores and e-commerce websites.
Pandemic-driven heightened health awareness has motivated people to workout at home, join gyms and yoga centers, go cycling, or play sports. This has caused a surge in demand for sports apparel and accessories. While the resurgence of COVID-19 cases is leading to the re-imposition of restrictions, solid progress on the vaccination front led to rising outdoor fitness activities this year. The expected continuation of this trend should keep increasing the demand for fitness apparel. The global sports apparel market is expected to grow at a 4.8% CAGR to $267.58 billion by 2028. So, both NKE and UAA should benefit from the industry tailwinds.
But while NKE gained 7.8% over the past month, UAA surged 29.8%. And in terms of their past nine months’ performance, UAA is a clear winner with 58.6% gains versus NKE’s 32.5%. But, which of these stocks is a better pick now? Let’s find out.
Recent Financial Results
NKE’s revenues for its fiscal fourth quarter, ended May 31, 2021, increased 95.5% year-over-year to $12.34 billion. The company’s gross profit was $5.66 billion, up 140.3% from the prior-year period. Its pre-tax income is reported at $1.85 billion, versus an $804 million loss in the prior-year period. NKE’s net income was $1.51 billion for the quarter, versus a $790 million loss in the year-ago period. Its EPS is reported at $0.93, compared to a $0.51 loss per share in the prior-year period. The company had $9.89 billion in cash and cash equivalents as of May 31, 2021.
For the second quarter, ended June 30, 2021, UAA’s net revenues increased 91% year-over-year to $1.35 billion. The company’s gross profit was $668.82 million, up 91.5% from the prior-year period. Its adjusted operating income came in at $124 million for the quarter, compared to a $131 million loss. UAA’s adjusted net income has been reported as $110 million, compared to a $141 million loss in the year-ago period. Its adjusted EPS was $0.24, versus a $0.31 loss per share in the prior-year period. UAA had $1.36 billion in total cash and cash equivalents as of June 30, 2021.
Past and Expected Financial Performance
NKE’s revenue and EBITDA grew at CAGRs of 7% and 15.4%, respectively, over the past three years. Its levered free cash flow margin has increased at a 20.5% CAGR over the past three years.
Analysts expect NKE’s revenue to increase 13% year-over-year in the current year and 9.8% next year. Its EPS is expected to increase 21.6% in its current fiscal year and 17.1% next year. The stock’s EPS is expected to grow at a 17% rate per annum over the next five years.
In comparison, UAA’s revenue and EBITDA grew at CAGRs of 2% and 24.5%, respectively, over the past three years. Its levered free cash flow margin has increased at a 31/3% CAGR over the past three years.
Analysts expect UAA’s revenue to increase 23.5% year-over-year in the current year and 57.3% next year. Its EPS is expected to grow 315.4% in the current year and 12.5% next year. However, analysts expect the stock’s EPS to grow at a 20% rate per annum over the next five years.
NKE’s trailing-12-month revenue is 8.2 times UAA’s. NKE is also more profitable, with an 18% EBITDA margin versus UAA’s 11.7%.
NKE’s ROE, ROA and ROTC values of 55%, 13.1%, and 19.4%, respectively, compare favorably with UAA’s 22%, 6.2%, and 8.4%.
In terms of non-GAAP forward PEG, NKE is currently trading at 2.37x, which is 30.2% higher than UAA’s 1.82x.
And in terms of forward EV/Sales, NKE’s 5.38x is 162.4% higher than UAA’s 2.05x.
While NKE has an overall C grade, which translates to Neutral in our proprietary POWR Ratings system, UAA has an overall B grade, equating to Buy. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
Both the stocks have a B grade for Quality, which is consistent with their higher-than-industry profitability ratios. UAA’s 49.4% trailing-12-month gross profit margin is 40.9% higher than the 35.1% industry average, while NKE’s has a 44.9% gross profit margin, which is 28% higher than the 35.1% industry average.
In terms of Momentum, both the stocks have been an A, which is in sync with their impressive price gains over the past year. UAA has gained 45.5% year-to-date, and NKE has delivered 21.8% returns.
Of the 35 stocks in the A-rated Athletics & Recreation industry, NKE is ranked #23, while UAA is ranked #12.
Beyond what we’ve stated above, our POWR Ratings system has also rated both NKE and UAA for Growth, Sentiment, Stability, and Value. Get all UAA ratings here. Also, click here to see the additional POWR Ratings for NKE.
Rising demand for flexible and comfortable sports apparel should benefit both NKE and UAA in the coming months. However, we think its relatively lower valuations and better analyst sentiment make UAA a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Athletics & Recreation industry.
NKE shares were trading at $170.39 per share on Tuesday afternoon, down $1.97 (-1.14%). Year-to-date, NKE has gained 20.93%, versus a 19.15% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More…
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