What's the Best Way to Profit From Athletic Retail Growth?

Under Armour presented strong earnings, but is it, Nike, Finish Line, or Foot Locker the best way to capitalize on the performance?

Feb 8, 2014 at 9:30AM

After Under Armour's (NYSE:UA) large post-earnings gains, many investors are excited. Unfortunately, some are also scared that the stock is now too expensive. Therefore, numerous investors are seeking other ways to profit from the strength of Under Armour, buying peer Nike (NYSE:NKE) or athletic retailers like Foot Locker (NYSE:FL) and Finish Line (NASDAQ:FINL). So what's the best way to play the success of Under Armour right now?

Under Armour: Impressive in all facets
Under Armour finished with gains of 26% in the final two sessions of last week; these gains were created following earnings. Essentially, the company's quarterly report was one of the more impressive that we've seen in retail over the last year, and definitely the best during this earnings season.

For the fourth quarter, Under Armour announced revenue of $683 million, which was $177 million better than the consensus and good for a 35% year-over-year gain. Profits were solid as well, with an EPS of $0.59 that was $0.06 better than analysts expected.

For those looking ahead, Under Armour said that strong holiday sales have already carried over to January. As a result, guidance for 2014 was estimated at $2.86 billion, which was far better than the $2.77 billion that analysts foresaw.

Is Under Armour too expensive?
While Under Armour is apparently clicking on all cylinders, the one knock against the company is that it's too expensive for new investors.

If we look at Under Armour on a multiple basis, it trades at four times this year's estimated sales and a forward P/E ratio of 46. For comparison, peer Nike trades at 21 times this year's earnings and 2.17 times this upcoming year's estimated revenue. This means that Under Armour is about twice as expensive.

Nike is without question Under Armour's closest competitor/peer. With Nike trading at a 50% discount in the same segment of the market, many believe that it presents a better investment value.

The problem with this logic is that Nike is well saturated in emerging markets. Meanwhile, Under Armour is in the early phases of both women's apparel and emerging market growth. There is also the issue of growth, as Under Armour is projecting sales growth of 23% in 2014 while analysts for Nike expect growth of just 8%.

Under Armour might be twice as expensive as Nike, but it's also growing nearly three times faster. For most investors, that's a ratio that's clearly in Under Armour's favor.

Should you buy Under Armour retailers ahead of earnings?
While we established that Under Armour is likely presenting a better investment opportunity than peer Nike, there is still a question of whether to invest in retailers that sell Under Armour (and Nike) products.

The two most notable retailers are Foot Locker and Finish Line. Both sell Under Armour and Nike shoes and apparel.

For many, Foot Locker has been the investment of choice in this space, more than doubling the stock performance of Finish Line over a two-year span. However, it's worth noting that Finish Line is expected to grow 11% in this coming year, more than double Foot Locker's anticipated growth rate. It is also cheaper at 0.79 times sales.

Buyers in this space should be cautious, however: Under Armour and Nike are both seeing strong direct-to-consumer sales that essentially cut out the third-party retailer. This is a primary reason that margins have increased in recent quarters.

As direct-to-consumer sales rise and emerging markets produce more revenue, U.S. stores like Foot Locker and Finish Line will likely benefit less from the performance of Under Armour and Nike. Thus, Finish Line may present value in the coming year, but presents higher risks over a longer period of time.

Final thoughts
Given higher direct-to-consumer sales and the impressive growth advantage over Nike, Under Armour still looks to be the best investment option in this particular space -- even after post-earnings gains of 26%.

Furthermore, in a retail sector that has shown considerable weakness both in holiday sales and margins, Under Armour is a breath of fresh air, making it well worth the premium that it has been given.

Brian Nichols owns Under Armour. The Motley Fool recommends and owns shares of Nike and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information