Big Boy vs. Little Lad
It's no secret that Nike (NYSE: NKE ) is the largest publicly traded shoe company in the world. With $25.3 billion in revenue as of its most recent fiscal year, the company has had a tremendous run. Nike has increased its revenue by 7.2% per annum since the end of its 2009 fiscal year (ending in May) and its revenue has increased by an even more impressive 8.4% per annum since 2004. However, just because the company is the 800-pound gorilla in the room, that doesn't mean that it is the most attractive in its industry. In this article, I will describe the differences between two very different companies in the shoe industry; Nike and Deckers Outdoor Corporation (NASDAQ: DECK ) .
Like Nike, which was founded in 1968, Deckers Outdoor Corporation has a long history of operations (incorporated in 1975). However, Deckers never quite reached the size of its peer, with only $1.41 billion (or 5.6% the size of Nike) in sales by the end of its 2012 fiscal year. Deckers' sales growth has been considerably more impressive at 19.7% per annum over the past five years. Over a 10-year history, the company's sales growth has clocked in at an astronomical 31.4% per annum, suggesting that the company is successfully playing catch-up.
Investors have been drawn to Deckers Outdoor Corporation, and its shares have more than doubled from their 52-week low of $28.53 in October of 2012 to $65.92 as of this writing. Despite this significant increase in share price, Deckers still trades at a substantial discount to Nike, with a trailing price/earnings ratio of 17.6 versus Nike's 26.1, but one has to wonder if this discount is warranted or if Nike is merely overvalued. I collected some valuable data on the two companies in question, which is illustrated in the table below:
In this table, all data used is five-year average data. A "+" sign after a number indicates that there has been a general trend upward over the past five years, while a – sign implies a downward trend, and no sign suggests either relative consistency or no identifiable trend.
According to the first row in this table, we see that Nike sports (yeah, I went there!) a lower return on equity, which is a measurement of how much from every dollar a shareholder receives from the company's operations. However, the return on equity for Nike is still an attractive 20.4%, and has increased almost every year to a high in its most recent fiscal year of 22.3%, compared to the current return on equity (and five-year low) of 17.4% for Deckers.
From the perspective of net profit margin, we see that both companies have stayed fairly consistent, but Deckers clearly beats out Nike at 12.9% vs. 9.5%. This is likely attributable to the former's key niche with its UGG brand, whereas Nike's net profit margin is diluted by a well-diversified portfolio of brands, some of which perform very well and some of which likely underperform. The downside to the niche appeal for Deckers is that, with 83.7% of its sales coming from its UGG line, a sudden change in consumer preferences could cause sales and net income to plummet. Essentially, this means that Nike's net profit margin, while lower, is less likely to fall victim to the sentiment of consumer fad fallouts.
Looking at the current ratios of both companies, a measure of liquidity, we see that Nike has a healthy five-year average of 3.12. However, Deckers takes the cake with an impressive 4.11. While this should be very attractive for the Foolish investor, the downside for Deckers is that this ratio has declined almost every year to a low of 2.59 in 2012. In the meantime, Nike has seen its current ratio increase almost every year to a high of 3.47, suggesting that it is more liquid and that Deckers may eventually face difficulty in meeting its operating requirements if it continues to deteriorate.
From a debt perspective, it's hard to say that either company is in the "lead". Although Deckers currently has no debt, Nike's 5% debt/equity ratio should be essentially on par with having no debt, as it is practically impossible for either company to have financial difficulties due to being overburdened by debt.
Both companies appear fundamentally sound and attractive in spite of their high price/earnings ratios. Deckers seems slightly more attractive because of how cheap it is relative to Nike, but the Foolish investor would be wise to keep an eye on it. A combination of improving fundamentals on the part of Nike and deteriorating or good but consistent fundamentals on the part of Deckers may leave the owner of Deckers in the dust.
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