The sporting goods business has been booming for the last decade, and Under Armour (NYSE:UA) (NYSE:UAA) and Adidas (NASDAQOTH:ADDYY) have both ridden the wave. But the two companies have very different strategies, with Under Armour being the upstart trying to wedge its way into everything from athletic wear to sneakers and Adidas being the old-school company with a stranglehold on the soccer market.
Which one is the better buy today? A look at the numbers makes the picture a little clearer.
Scale goes to Adidas
You can see below that from a scale standpoint Adidas beats Under Armour hands down. Not only is it more than five times bigger on a revenue front, it has made nearly 10 times more in net income over the past year. Scale doesn't necessarily equal success, but it lays the framework for how we should think about these companies.
For years, Under Armour's smaller size was a point of strength. The company grew like a weed because it had hit products and the ability to grow into more international markets and more business segments. But that's become a problem for the company in the past year as the smaller size and higher growth has become a problem.
Under Armour trips on its own growth
When a company grows rapidly, it can cover up a lot of operational inefficiencies clouded by the growth. In Under Armour's case, the company has been able to grow its business as it expanded product lines, but that growth was hiding the fact that operating margins have been in decline at the same time the company built out retail stores, which carry heavy operating costs.
The chart below shows the company's long-term growth and also its downfall over the past year. Notice that net income didn't plunge until early 2017, but operating margin has been falling for three years.
Companies in retail face a challenge in balancing expanding their footprint to capture growth, but not increasing expenses so fast that they run into big losses if revenue begins to drop. Under Armour saw the downside of the business this year when revenue dropped.
Adidas is slow but steady
If we look at the same chart for Adidas you can see that the company is actually trending in the opposite direction as Under Armour. It isn't growing as quickly, but operating margin is on the rise as it leverages the growth it does have.
Since Adidas is a mainstay in the soccer world, it can choose to expand into new sports in a more conservative way. It's done that in basketball, signing James Harden, Andrew Wiggins, and Damian Lillard to sponsorship deals and slowly building a steady business.
Investors in Adidas won't see the kind of growth Under Armour had from 2007 to 2016, but they'll have a very stable company, and that's worth a lot in the sporting goods business.
The risky play versus a mainstay
I think Adidas is the better buy between these two stocks given its long-term track record and ability to expand margin recently. Under Armour has expanded into too many markets too quickly and its brand seems to have taken a hit as Nike, Adidas, Puma, and others refine their branding. I don't see an easy fix if brand quality is on the decline.
The sporting goods business can be fickle, and Adidas has shown the ability to thrive through multiple cycles, something that gives me confidence in adding a thumbs-up CAPScall on my CAPS page for Adidas stock. Under Armour needs to prove it can simply survive the first real roadblock it's faced in its short history.