Many footwear stocks have been under pressure over the past year due to slowing sales, falling prices, and the bankruptcy of Sports Authority, once the largest sporting goods retailer in the country.

Nike (NKE 0.36%), the bellwether of the industry, has fallen 16% over the past 12 months. Skechers (SKX -2.90%), the less popular underdog, fared much worse with a 46% drop. Is either company a decent contrarian play after those declines?

Image source: Pixabay.

How fast are Nike and Skechers growing?

Nike's revenue grew 6% in fiscal 2016, and is expected to rise another 8% this year and another 9% to $38 billion next year. That growth looks solid, but CEO Mark Parker previously claimed that Nike could generate $50 billion in annual revenue by 2020 -- fueled by growth in e-commerce, women's apparel, and overseas markets. But even if Nike's sales grow 10% in fiscal 2019 and 2020, it will still miss that target by about $4 billion.

Skechers' revenue rose 32% in fiscal 2015, and is expected to rise 15% this year and 11% next year. While Skechers' top line growth looks stronger than Nike's, it generated just $3.15 billion in sales last year -- less than 10% of Nike's revenue in fiscal 2016. As a result, investors are paying closer attention to Skechers' slowdown than its double-digit growth figures. Skechers believes that opening new international distribution centers and targeting teenagers can get its growth back on track.

60% of Nike's revenues came from its namesake footwear sales last quarter. The rest mainly came from apparel and equipment sales. That makes it more diversified than Skechers, which generates most of its revenue from footwear sales. Nike's inventories rose 11% annually last quarter, while Skechers' inventories climbed 26% -- indicating that Nike was moving goods off shelves at a faster rate.

Nike is more globally diversified than Skechers, with just 44% of its revenue coming from North America last quarter, whereas 62% of Skechers' revenue came from the United States and Canada. While this means that Nike is more exposed to a strong dollar, that headwind could become a tailwind if the greenback weakens.

Image source: Skechers.

Margins and profitability

As one of the largest footwear and sports apparel makers in the world, Nike often utilizes economies of scale to manufacture products at lower costs than its smaller rivals. However, Nike's gross margin actually fell 200 basis points annually to 45.5% last quarter, while Skechers' gross margin rose 60 basis points to 47.4%.

Skechers achieved that growth by raising its average selling prices. Nike did the same, but those benefits were offset by currency impacts, a higher off-price mix, its exit from the golf equipment business, and a change in the way it reported cost of goods sold. However, Skechers' operating margin of 11.4% remained lower than Nike's 13.5% -- indicating that Nike still kept better control over its operating expenses.

Skechers' earnings rose 65% in 2015, but that growth is expected to slow to 20% this year and 14% next year, likely due to slowing sales and declining footwear prices. Adidas' recent comeback and Under Armour's (UAA 3.30%) (UA 2.74%) aggressive marketing blitz and retail expansion could also throttle Skechers' growth.

Meanwhile, Nike's earnings rose 17% last year, and are expected to improve 10% this year and 13% in fiscal 2018. However, Nike supports that growth with debt-funded buybacks, spending $3.7 billion on its own shares over the past 12 months. Skechers doesn't currently have a buyback plan in place. Nike also pays a forward yield of 1.2%, which is easily supported by its payout ratio of 29%, while Skechers has never paid a dividend.

Earnings forecasts and valuations

Nike currently trades at 24 times earnings, which is lower than the industry average of 26 for apparel and footwear makers. Skechers, on the other hand, has a P/E of 13.

Looking further ahead, analysts expect Nike's annual earnings to grow at an average rate of 13% over the next five years. That gives it a 5-year PEG ratio of 1.7, which is well above the "undervalued" threshold of 1. Skechers is expected to grow its annual earnings 20% during that period, which gives it a much cheaper PEG ratio of 0.6.

The winner: Skechers

Nike is still a solid long-term investment, but Skechers is cheaper relative to its earnings growth potential. Many investors are currently focused on Skechers' slowing sales and tougher competition from bigger rivals like Nike, but the brand has room to grow internationally and expand into adjacent markets like apparel and sports equipment. Skechers is certainly a riskier play than Nike, but it looks like the better buy at current prices.