Over the past few years, Under Armour (UAA 6.09%) (UA 6.14%) was considered the hot growth stock in sportswear and footwear, while Adidas (ADDYY 2.06%) was frequently dismissed as a "mature" play with limited growth potential. But over the past 12 months, the tables abruptly turned -- Under Armour stock plunged more than 50%, while Adidas rallied over 50%. Let's take a look at how these companies' growth trajectories reversed, and whether or not one stock is now a better long-term play than the other.
Image source: Adidas.
The differences between Under Armour and Adidas
In fiscal 2016, 67% of Under Armour's revenue came from apparel sales, 21% came from footwear, 8% came from accessories, 2% came from "connected fitness" products like wearables and apps, and the rest came from licensing agreements. Only its footwear, connected fitness, and licensing units posted double-digit annual sales growth last quarter.
In the first nine months of 2016, 53% of Adidas' revenue came from footwear, 38% came from apparel, and 9% came from "hardware" products like accessories and training equipment. Only the footwear business posted double-digit annual sales growth during that period.
83% of Under Armour's revenue came from North America in 2016, but that region accounted for just 17% of Adidas' top line in the first nine months of the year. The rest of Adidas' business is diversified across the Americas, Asia, and Europe -- but its biggest market is Western Europe, which generated 29% of its sales during that period.
Top line comparisons
Under Armour's quarterly sales growth has slowed considerably over the past few years. Its revenue rose just 12% annually to $1.3 billion last quarter, which was much lower than the 20%+ growth it had generated over the past six years. Under Armour attributed that slowdown to tougher competition, inventory management expenses, and currency headwinds.
For the current quarter, UA only expects revenues to rise at a "mid single-digit rate" due to softness in the North American market and unresolved expenses from the Sports Authority bankruptcy last year. The company's North American sales rose just 6% annually last quarter, compared to 55% growth at its smaller international unit. It also expects revenues to rise just 11%-12% in 2017, compared to 22% growth in 2016.
Under Armour's Curry 2 shoes. Image source: Under Armour.
Meanwhile, Adidas' sales growth has been accelerating, fueled by a five-year turnaround plan it initiated in mid 2015. That plan called for a faster rotation of its products, aggressive expansions into key urban markets, higher investments in e-commerce, and stronger engagement campaigns with customers, retailers, and partners.
Adidas' sales rose 14% annually to €5.4 billion ($5.8 billion) last quarter, and grew 15% in the first nine months of 2016. Adidas now expects its full-year revenue to rise in the "high teens" on a constant currency basis, and will likely provide its 2017 guidance when it reports its fourth quarter earnings on March 8.
Bottom line comparisons
Under Armour's year-end inventories rose 17% annually due to tougher competition and the Sports Authority bankruptcy -- which led to big markdowns. UA's increasing dependence on footwear is also troubling, since it's a lower margin market which requires much higher investments in sales, marketing, and sponsorship deals. Adidas' inventories rose 18% annually last quarter, but the company called it a necessary move to support its "top-line momentum."
On the bottom line, UA's net income fell 1% annually to $105 million last quarter, due to the aforementioned challenges. Analysts expect UA's earnings to grow just 4% this year, but possibly accelerate to 19% growth in fiscal 2018 -- if its international expansion efforts are successful. Adidas' net income from continuing operations rose 15% annually (on a constant currency basis) last quarter, thanks to the cost benefits of its turnaround plan. Adidas expects its net income from continuing operations to rise 35%-39% for the full year.
The valuations and verdict
Under Armour's Class A shares still trade at about 48 times earnings, a premium which can't be justified by its past and projected growth rates. That's also significantly higher than Adidas' P/E of 31 and the industry average of 27 for apparel makers. Adidas also trades at a premium to the market, but its P/E is supported by its projected growth rate for the year. Adidas also pays a dividend with a forward yield of 1.5%, while Under Armour doesn't pay a cash dividend for either class of its stock.
The choice between Under Armour and Adidas is a simple one. Under Armour's top line growth has hit a brick wall, it's too dependent on the sluggish North American market, its margins are crumbling, and its valuations are too high. Meanwhile, Adidas' growth is accelerating, it's well diversified across multiple markets, its valuation is justified by its growth, and it pays a dividend. Therefore, Adidas is clearly the better long-term sportswear play at current prices.
