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NIKE vs Adidas vs Under Armour vs Lululemon
The Best Sportswear Stock?
Today, I analyse some of the big players in the sportswear industry namely NIKE, Adidas, Under Armour and Lululemon and provide a prediction as to which will provide the best returns in 2022.
In this report, I will cover the following:
Revenue and Margins
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NIKE, Inc. (Ticker: NKE) design, develop and sell athletic footwear, apparel, equipment, accessories and services. NIKE is the largest seller of athletic footwear and apparel in the world. NIKE sells their products directly to consumers through NIKE-owned retail stores and digital platforms and to retail accounts and a mix of independent distributors, licensees and sales representatives in virtually all countries around the world. NIKE also offers interactive consumer services and experiences through their digital platforms. The company was founded in 1964 and headquartered in Oregon in the United States.
Adidas AG (Ticker: ADS.DE) designs and manufactures footwear, apparel, and accessories. The Adidas group is made up of Reebok, TaylorMade, and Runtastic. The company also owns a share of the German football club Bayern Munich. Adidas is the largest sportswear manufacturer in Europe and is second only to Nike worldwide. The company was founded in 1949 and headquartered in Herzogenaurach, Germany.
Under Armour, Inc. (Ticker: UA) develop, market and distribute branded performance apparel, footwear and accessories for men, women and youth. The brand’s performance apparel and footwear are engineered in many designs and styles for wear in nearly every climate to provide a performance alternative to traditional products. Their products are sold worldwide and are worn by athletes at all levels as well as by consumers with active lifestyles. The company was founded in 1996 and headquartered in Washington, D.C. in the United States.
Lululemon Athletica Inc. (Ticker: LULU) is principally a designer, distributor, and retailer of healthy lifestyle inspired athletic apparel and accessories. The company has a vision to be the experiential brand that ignites a community of people through sweat, grow, and connect, which they call "living the sweatlife." Lululemon promotes a set of core values in their business which include taking personal responsibility, nurturing entrepreneurial spirit, acting with honesty and courage, valuing connection and inclusion, and choosing to have fun. The company was founded in 1998 and headquartered in Vancouver, Canada.
2. Market Capitalisation
From a market cap perspective, NIKE is five times larger than its nearest competitor.
3. Revenue and Margins
NIKE has the largest share of revenue recording over $12.2 billion of sales in the most recent earnings and growing 16% year-over-year (YoY).
Next, Adidas reported quarterly revenue of €5.8 billion (the graphic is converted to USD using an average FX rate for comparative purposes) representing an increase of 3% YoY.
Under Armour reported quarterly revenue of $1.55 billion, growing 8% YoY.
Finally, Lululemon reported quarterly revenue of $1.45 billion representing an increase of 30% YoY.
While it may have the smallest revenue base, Lululemon has got the most superior gross and operating margins. It should also be pointed out that last quarter Lululemon grew revenue almost twice as fast as NIKE, almost four times as fast as Adidas and ten times faster than Under Armour.
Lululemon has impressed the most with regard to revenue and margins.
To assess the growth prospects of each company I have relied on analyst estimates for 2022.
Lululemon is expected to grow revenue the fastest over the next twelve months with NIKE expected to have the slowest growth. Adidas is expected to grow earnings the fastest in 2022 and this is because it increased marketing expenses significantly in 2021 thereby reducing its operating margin. To elaborate, Adidas recorded an operating margin of 13.2% in Q3 2020 compared to 11.7% in Q3 2021.
Lululemon has impressed the most with regard to growth.
5. Valuation Multiples
Now, we're down to the nitty gritty - the valuations.
Price/Sales and EV/Sales
In both of these scenarios Lululemon is the most expensive and Under Armour is the cheapest. To interpret this we must remember that all revenue is not equal. In Section 3 we learned that Lululemon has the highest operating margin at 18% whilst Under Armour has the lowest operating margin at 11%. For every $1 of revenue, Lululemon keeps $0.18 but Under Armour only keeps $0.11. Lululemon could make 40% less sales than Under Armour and still end up with the same operating income.
Similar to the previous valuation metrics, Lululemon has the richest PE ratio whilst Under Armour has the meagrest. This ratio takes into account the margin profile differences and suggests that Under Armour is relatively undervalued compared to its peers. In 2020, Under Armour incurred significant restructuring and impairment costs as part of a five-year turnaround plan resulting in an operating margin of 4% in Q3 2020 compared to 11% in the most recent quarter.
This is probably one of the most important valuation metrics because EBITDA (earnings before interest, taxes, depreciation, and amortization) is commonly used as an approximation for cash flow available to the company. Under Armour has the most impressive multiple here.
Under Armour has impressed the most with regard to valuation having the best multiple in all four instances.
So, which stock do I believe will provide the best shareholder returns over the next twelve months?
First off, let's take a look at which stock had the best returns over the past twelve months:
Under Armour: +22%
It should also be pointed out that NIKE and Adidas pay a dividend which is an extra return to shareholders not factored into the above. Lululemon and Under Armour do not pay dividends.
As a long term investment I believe that Lululemon could provide the best shareholder returns as a result of its superior growth rates and margins but investors will pay a premium for this based on the current valuation. NIKE should continue to reward long term shareholders with capital appreciation as well as a growing dividend.
I am going to make a bold statement and say that over the next twelve months I believe that Under Armour could provide the best shareholder returns once again. Put simply, the stock is a turnaround play. Management appear to be executing this plan well so far and are still only in year two of the five-year plan. Over the past four quarters, it has beaten earnings estimates by an average of 244%. The stock also benefits from having a more favorable valuation multiple as its starting point.
Let’s see what happens in 2022.
Leave a comment below on which stock you think will provide the best returns in 2022 and why 👇
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Wolf of Harcourt Street
Disclaimer: I am not a financial adviser and I am not here to give specific financial advice. The opinions expressed are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. The information is based on personal opinion and experience, it should not be considered professional financial investment advice. There is no substitute for doing your own due diligence and building your own conviction when it comes to investing.