Nike vs Under Armour Stock, Which Is Best?

The sportswear industry struggled last year with high inflation affecting consumers’ discretionary spending on sportswear. As a result, shares of NIKE, Inc. (NYSE:NKE) and Under Armour, Inc. (NYSE:UA) experienced sustained declines, down 18% and 22% year-to-date, respectively.

But the worldwide sportswear market is expected to return to a growth trajectory soon and expand at a 5.9% CAGR, so which of these two stocks will make the faster recovery?    

Is NIKE Stock Worth the Premium?

Following the 2020-21 period, Nike shifted focus to speeding up its e-commerce and direct-to-consumer businesses, which resulted in higher sales. Buzz grew as it ventured into the metaverse and virtual marketplaces too.

However, the stock’s 16.5% loss over the past year reflects investors’ disappointment in the company’s slower growth and poor guidance. While revenue expanded at a CAGR of 10.2% over the past three years, analysts expect it to grow marginally in FY 2024 and by only 2.4% in FY 2025.

Like other consumer-facing companies, NIKE grapples with scarce demand and constrained expenditures amid high inflation.

Weak sales continued to impact its top line during the holiday quarter (which ended February 29) but were partly offset by favorable pricing. In the fiscal third quarter, revenues stood at $12.43 billion, almost unchanged from last year, though it topped estimates by 1.1%.

The bottom line shows NIKE ‘s net income at $1.17 billion compared with the $1.24 billion reported in the year-ago quarter. However, it had a solid gross margin of 44.8%, up 150 basis points year over year. It has also been reducing inventory levels.

Nike’s Plan To Dominate

The sneaker manufacturer is on the path to recovery. While its Consumer Direct Acceleration Strategy has yielded returns, management thinks adjustments are necessary.

Firstly, the company is sharpening its abilities toward driving innovation across its product range and “bolder and more distinctive” brand marketing approach.

NIKE intends to pursue sustainable growth by reconfiguring its portfolio over the next few months. More importantly, the company wants to build strong wholesaler relationships to solidify its moat and bolster growth initiatives.

If these restructuring plans are successful, financial woes may become a rearview mirror concern, even if near-term pressures persist.

Despite the slowing business, the Board has not compromised its tradition of rewarding shareholders. In the third quarter, the company returned $562 million through dividends and $866 million via share repurchases.

The company’s 22 consecutive years of increasing dividends and a reasonable payout ratio of 39.3% ensure its dividend remains as safe as can be. Its forward annual dividend of $1.48 yields 1.67%.  

Despite declining over the past year, the NKE’s valuation looks expensive, especially considering its so-so growth prospects. The stock trades at 24x times non-GAAP forward earnings, at a high premium to its industry peers.

The weak growth prospects make it trade at a price-earnings-to-growth (PEG) of 2.06x, about 30% higher than the industry average.  

Can Under Armour Grow its Market Value Further?

Over the past few years, Under Armour has strengthened its market position by adopting a more consumer-centric approach and introducing innovation across its product lines. 

Like most of its rivals, the sportswear brand has been grappling with slowing sales as broader economic factors affected the industry.

Under Armour is seeing softer demand in North America, just one of the 100 countries in which it operates but the one that accounts for most of its total revenues. Weakness in wholesale business was a primary driver, representing about 59% of its net revenues in fiscal 2023.

The demand weakness led to the company reporting a 6% year-over-year decline in revenue in the fiscal third quarter ended December 31. Its net income for the quarter came in at $114.1 million, compared to $121.6 million in the year-ago period. Adjusted EPS was $0.19, above its anticipated range of $0.09 to $0.11.  

Is a Turnaround Coming?

Although the company faces challenges, it has also been seeking a turnaround, just like NIKE, but emphasizing the U.S. market. Under Armour outlined a growth strategy labeled “Protect this House 3” under the leadership of former CEO Stephanie Linnartz. It was three-pronged.

First, management plans to strengthen the brand globally, particularly in the U.S., and secondly, they aim to improve product offerings. A third string to the bow is to renew the focus on U.S. sales.

In the halls of power some changes have taken place with Stephanie Linnartz resigning as CEO. She was replaced by founder Kevin Plank on April 1. Investors perceived that change negatively because it signaled that the progress of the strategy might not be satisfactory. After the news came out, UA’s shares fell.

On the other hand, analysts expect Plank to concentrate on improving corporate top-line growth and returning North American revenues to higher levels seen previously.

Leadership changes between phases of vital business turnarounds can bring some uncertainty, but Plank has the credentials to get Under Armour back on track.

Management expects full-year revenue to sit between 3% and 4% lower than last year’s figure. Notably, management raised the gross margin forecast by 120-130 bps, while adjusted EPS is forecasted to be between $0.50 and $0.52.

Shares of the apparel retailer have declined by more than 20% over the past month amid demand downturns and the CEO switch. This has led to the stock trading at a cheap valuation compared to its industry peers.

In terms of non-GAAP forward price-to-earnings, the stock is trading at 13.37x, 14.5% lower than the industry average, and a 44.3% discount to NKE. Analysts expect the company’s EPS to increase 12.2% in fiscal 2024 and 50.9% in fiscal 2025, so the stock looks undervalued at the current price level.  

Also, it is trading at 0.52 times forward sales, which looks attractive compared to its industry peers.

NIKE vs Under Armour Stock?

Under Armour appears to be the better bet with analysts forecasting an average price target of $15.50 per share, suggesting the the stock could soar by as much as 137%. Nike projections are more muted with the consensus implying a gain of 27% to fair value.

So while softening demand amid weak discretionary spending has affected both stocks’ performances, turnarounds for each bode well for the future with Under Armour appearing to have the upside advantage on a valuation basis.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.