2 Faster-Growing and Cheaper Footwear Alternatives to Nike?

Nike's fiscal fourth-quarter report was fantastic, but its stock might be overpriced; these two stocks could make better investments.

Jul 2, 2014 at 5:16PM

Nike's (NYSE:NKE) earnings report was strong, and therefore investors are buying the stock. However, one segment in particular thrived more so than the others, which consequently brings Skechers (NYSE:SKX) and Foot Locker (NYSE:FL) into the discussion as investment options.

An exceptional quarter
Nike's fiscal fourth-quarter report showed strength throughout all key areas of its business. The headline numbers were revenue growth of 10.4% for $7.4 billion and a gross margin that soared 170 basis points to 45.6%. However, Nike also showed an 11% increase in future orders, slightly outpacing revenue growth, and is guiding for low double-digit revenue growth in its upcoming quarter.

As for the key businesses of footwear and apparel, which make up nearly 88% of total sales, both saw growth that exceeded total revenue. Specifically, apparel increased 12% to $2.1 billion, but more important is footwear, which grew 14% to $4.4 billion as Nike's largest and strongest segment.

Nike's footwear growth tells us one thing
Nike is without question the most dominant footwear brand on the planet. As of April 12, its Nike and Jordan brands represented 62.6% of the entire U.S. sneaker industry. Therefore, its growth tells us that sneakers as an industry is a great place to invest.

BlogsSource: MarketWatch year to date through April 12.

Unfortunately for Nike, shares are already rather inflated, trading at a whopping 23 times forward earnings. Due to this valuation premium, shares of Nike traded higher by just 3% following its strong fiscal fourth quarter -- not quite the reaction many would've expected following such a great quarter.

Where else to invest?
With that said, Nike may be the largest footwear brand in North America, but of the top five, Skechers is growing the fastest. While Skechers' market share of only about 3% is rather small, its 22% growth in market share year over year is impressive to say the least.

For the last couple of years, Skechers has thrived behind the success of its walking-shoe line conveniently called GOwalk. According to the company, it now owns a 50% share of this particular segment of the industry, which is up from 34% last year. Moreover, thanks to improved marketing and technology to make shoes lighter, Skechers' GOrun line has provided a nice spark to its top line.

Skechers is a company that grew revenue 21% during its last quarter to $546.5 million, with its operating earnings increasing more than 200% to $48.2 million. Thus, with Skechers growing faster, investors might find its 17.2 times forward earnings multiple more attractive than Nike's premium.

Take advantage of the overall market
Another way to profit from the success of Nike in its most successful industry is to invest in footwear retailers. Notably, this also gives investors exposure to other strong brands like Skechers and an overall industry that is growing rather quickly.

This brings Foot Locker into the discussion, as a large global retailer of footwear and apparel with nearly 3,500 locations. Last month the company announced first-quarter earnings, showing revenue growth of 13.4% for $1.86 billion.

Like Nike and Skechers, Foot Locker's gross margin also increased -- showing increased pricing power throughout the industry -- by 40 basis points to 34.6%. Also, the company's 7.6% increase in comparable-store sales shows that more consumers are rushing into existing stores, which also plays a large role in margin improvements.

While Foot Locker's 20% stock gains this year might lead some to believe it's fairly valued, investors should note that it trades at only 13.5 times forward earnings. This is clearly the cheapest multiple of the three companies and could mean that Foot Locker could still run much higher.

Foolish thoughts
Nike is a great company with solid growth and a bullish long-term outlook, but it is also priced at a premium. Therefore, Skechers and Foot Locker offer two cheaper and faster-growing alternatives that'll likely produce larger returns. While both are solid choices, Skechers' comparable sales growth of 5.6% lags Foot Locker's, thus the latter's organic growth is stronger to complement its cheaper stock, implying more upside potential.

A runaway retail winner? This coming consumer device can change everything
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Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Nike. 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.

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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.

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