Best Buy in Sports Apparel: Nike, Under Armour, or Lululemon?

Red Sox vs. Yankees, Real Madrid vs. Barcelona, or Usain Bolt vs. the speed of light... be it in business or sports, we all love a good rivalry. Let's take a look at three major contenders in the sports apparel business -- Nike (NYSE: NKE  ) , Under Amour (NYSE: UA  ) , and lululemon athletica  (NASDAQ: LULU  )  -- in order to try to find out which one may be the best acquisition for your portfolio.

Nike owns the heavyweight crown
Nike is the undisputed heavyweight champion in the sports shoes and apparel business. The company owns arguably the most valuable and recognized brand in the industry, and unparalleled global reach and a gigantic marketing budget provide competitive differentiation for Nike versus smaller industry players.
 

Size has important advantages in areas such as logistics and scale, which, combined with Nike's pricing power, generates above-average profitability for investors over time. Importantly, Nike is quite generous when it comes to distributing its cash flows to shareholders via dividends and share buybacks.

Source: Nike.

The company has increased its dividends over the last 12 years in a row, including a big hike of 14% announced in November 2013. During the quarter ended on Feb. 28, Nike repurchased 10.4 million shares for approximately $788 million as part of the four-year, $8 billion program approved by the board of directors in September 2012.  As part of this program, the company has repurchased a total of 39.6 million shares for an approximate value of $2.5 billion.

Considering the company's size, Nike is generating attractive growth rates. Sales during the fourth quarter of fiscal 2014 increased by 13% to $7 billion, while worldwide future orders increased by 12% in U.S. dollars, and by 14% when excluding currency fluctuations.

Under Armour for explosive growth
Under Armour is approximately one-tenth of Nike's size in terms of sales, but the company is running at full speed and generating spectacular growth rates for shareholders.

Sales during the fourth quarter of 2013 jumped by 35% to $683 million, and performance was remarkably strong across the board: Apparel revenues increased 35%, footwear sales grew 24%, and accessories sales increased by 52% versus the same quarter in 2012. Under Armour is actively growing its direct-to-consumer channel, with sales increasing by 36% during the quarter and representing a big 39% of total revenues.

Source: Under Armour.

Under Armour is broadly successful at gaining market participation via high-quality products and a strategy of permanent innovation, and the company has enormous room for growth by expanding into different sport disciplines and geographical markets in the years ahead.

International sales were only $37 million during the fourth quarter, a small 5% of total revenues. In comparison, Nike makes more than 50% of sales from global markets, so Under Armour has enormous room for international expansion in the long term.

This superior growth comes with a higher price tag, though. Under Armour trades at a P/E ratio of 70.5 times earnings, a substantial premium versus 24.6 for Nike and 27.8 for Lululemon.

Lululemon has visibility problems
Lululemon had a very tough year in 2013. In March, the company had to recall 17% of its yoga pants because of quality problems resulting in excessive sheerness. This was not a definitive solution to the problem, though, and customers continued complaining about quality issues in the following months.

Making things worse, founder and former chairman Chip Wilson made some remarkable public comments insinuating that women's bodies may be to blame for the problems with the company's products in November of last year. This naturally generated further complaints and even infuriation from Lululemon customers.

The company seems to be leaving those mistakes in the past, though, and there are some early signs of stabilization: Sales during the quarter ended on Feb. 2 increased by 7% to $521 million, which was better than the $514.9 million forecast on average by Wall Street analysts. On the other hand, comparable-store sales decreased by 2% on a constant-dollar basis.

Source: Lululemon.

CEO Laurent Potdevin seems quite optimistic about Lululemon's chances of implementing a successful turnaround and refocusing on growth in the medium term: "2014 is an investment year with an emphasis on strengthening our foundation, reigniting our product engine, and accelerating sustainable and controlled global expansion," Potdevin said in the earnings press release.

Lululemon is not completely out of the woods yet, but the company seems to be moving in the right direction lately, so it could be an interesting candidate for contrarian investors looking to profit from a turnaround.

Bottom line
Nike is clearly the quality play for investors looking to position their portfolios in a solid industry leader offering consistent capital distributions over time. Under Armour offers extraordinary growth potential for those who are not afraid of paying a premium when buying companies with superior growth. When it comes to Lululemon, the company offers less visibility than Nike or Under Armour, but uncertainty usually creates opportunity for contrarian investors.

As is usually the case, the best decision you can make will depend on your personal risk tolerance, targets, and overall vision of these companies.

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