Under Armour vs Nike: Athletic Gear Competes in NBA Playoffs

The NBA playoffs are here. In the  best-of-seven elimination tournament, the Golden State Warriors lead the Cleveland Cavaliers, 3-1.

Cleveland’s LeBron James and Golden State’s Stephen Curry are in the spotlight. James has an endorsement deal with Nike Inc. (NKE.N) and Curry wears Under Armour, Inc. (UA.N) gear.

So who will win? On the court the score might be 3-1, but it’s a different ball game when breaking down the financial numbers.

• Round 1: Revenue Size
  1. Nike’s revenue is significantly bigger, at least eight times as much as Under Armour’s.
  2. Under Armour’s debt/equity ratio is the highest ever at 54% — almost three times as much as Nike’s 17%.
  3. Under Armour’s debt/equity is also higher than the industry mean of 29%.
  4. However, there are analysts who argue that this is expected, considering Under Armour’s rate of growth.

Exhibit 1: Revenue Estimate for Q2 ending June 2016

Source: Thomson Reuters I\B\E\S

Round 2: Revenue Growth

1. This round goes to Under Armour.
2. Nike is on track to post 7.0% revenue growth for the current quarter. The last time Nike posted double digit growth was December 2014.
3. Under Armour has been posting double digit revenue growth since September 2009, and is projected to continue to do so over the next four quarters, suggesting that it has room to grow as a brand.

Exhibit 2: Revenue Growth YoY%

Source: Thomson Reuters I\B\E\S

Round 3: Return on Equity vs. returns at the store

Digging deeper into the data, we look at ROE, a measure of how well retailers use capital to generate profits. The industry-wide median ROE is 14.5%. Analysts’ mean forecast is that Nike will generate a 29.34% return on equity this year, while a highly rated StarMine analyst with a very accurate rating suggests a figure closer to 31.35%.

That’s considerably stronger than the rate at which Under Armour will generate profits on its balance sheets. The ROE estimate for Under Armour is 14.7%, just above the industry average. Round 3 goes to Nike.

Round 4: Operating Efficiency

Operating margin indicates how efficiently management is generating results. Fewer product discounts and promotions mean better profits.  On trailing four quarter margins, Nike’s operating profit margins have remained stable over the past three quarters, after it surged in 2014-2015. Currently, it is 14.0%, above the industry average, while Under Armour has been falling below the industry average since Q4 2014.

Consumers perceive the Nike brand as high quality and therefore Nike doesn’t have to offer discounts. During promotional periods, including Black Friday, other retailers offer steep discounts to lure shoppers into their stores. However, Nike doesn’t, because they don’t have to. The brand enjoys a loyal customer base that appreciates its quality. Therefore, Nike’s improving margins suggests that Nike has more pricing power, and enjoys better margins.

Exhibit 3: Operating Profit Margin

Source: Thomson Reuters I\B\E\S

Round 5: Stock Recommendations

Nike lowered earnings guidance in March, and as a result analysts followed suit. Still, Nike is releasing new products that are considered a novelty and have a cult following. Both brands are benefiting from the strong footwear market

Analysts seem to be more bearish on Under Armour stock. Its StarMine Analyst Revisions Model (ARM) score is low, at 3, suggesting analysts are likely to continue to revise estimates downwards. What’s more, Nike has more “buy” stock recommendations than Under Armour — 24 vs. 20.

Exhibit 4: Stock Recommendations: Nike vs. Under Armour

Source: Thomson Reuters I\B\E\S

Round 6: Business Segments

About 45% of Nike’s revenue is generated in North America, while 87% of Under Armour’s revenue comes from North America. Both brands have been hurt by the weakness in the U.S. retail industry, weak mall traffic and department stores sales, the strong dollar and less tourist shopping. Moreover, the retailer Sports Authority is closing its doors, which is also hurting both brands.

Still, 10% of Nike sales is generated in China. That’s a point of strength for Nike as athleisure is becoming a hot trend there and sports apparel is in demand for mainland Chinese shoppers. Marathon running is catching on there.

Nike is expected to benefit from its Olympic sponsorship in Brazil this year.

Round 7: StarMine Combined Alpha Model

CAM is our most powerful alpha model to date. It combines all the available StarMine signals into one exceptionally strong multifactor signal. Under Armour has a low score of 1, suggesting that there are a couple of worrisome factors. In addition, the stock looks overvalued, analysts are bearish and price momentum is weak.

Nike also has a weak score of 29, but nowhere near Under Armour’s, and is backed by good earnings quality and a low fraction of shares held short.

Exhibit 5: StarMine Combined Alpha Model: Nike vs. Under Armour

Source: Thomson Reuters Eikon

Full court press

Under Armour is benefiting from the strong basketball momentum the Warriors are having. It is also banking on the release of the Curry 2.5 shoe for the playoffs on July 1. The brand definitely has room for solid growth. It recently struck a $280 million apparel deal with the University of California.

However, Nike sponsors a bigger list of athletes playing different sports, has an established global reach, with pockets of strength and growth, and will benefit from the Olympics sponsorship. Finally, when it comes to social media Nike has significantly stronger following on all the mediums. Thus, when breaking down the numbers, it looks like Nike is better poised to win the best-of-seven. But on the court, Warriors are heavily favored to win the series which could lift Under Armour’s bottom-line.