The COVID-19 pandemic has led to a surge in people exercising at home as they remain cooped up due to lockdowns and border closures. Two of the more prominent sportswear brands are Nike (NYSE:NKE) and Under Armour (NYSE:UAA). Although many more people have taken to jogging around their block or visiting the nearby fitness corner to work out, the forced closure of brick-and-mortar stores meant that customers could not browse these stores for purchase, leading to a shift to online purchasing and digital sales.
Nike has been around much longer compared to Under Armour, being listed since 1980 compared to the latter's 2005. Under Armour is a relatively newer brand that was founded in 1996, while Nike was founded in the 1970s.
The two companies have grown rapidly over the last couple of years and are competing for a larger piece of the sportswear pie. Let's take a closer look at which company provides a more compelling investment thesis.
Profitable track record
Looking at the five-year financial track record for each company, both Nike and Under Armour enjoyed year-over-year increases in sales over the last five fiscal years, except for Nike's 2020 fiscal year, which saw it being adversely affected by store closures. Though 2020 saw revenue dip slightly for Nike, from $39.1 billion to $37.4 billion, this was still more than seven times higher than Under Armour's total 2019 sales of $5.3 billion.
When it came to net income, however, there was a stark difference between the companies. Nike was profitable in all of its five years, except for a sharp dip in profits for the fiscal year 2018 due to a change in tax treatment. Under Armour saw losses booked in two out of five years due to restructuring and impairment charges.
Consistent dividend payments
Despite the volatility in its earnings, Nike's cash flow has been consistently strong, allowing it to pay a consistent and rising dividend over the last five years. The annual dividend rose from $0.62 in 2016 to $0.955 in 2020, and every fiscal year saw a year-over-year rise. Under Armour had only declared dividends once in the last five years -- a $0.265 pay-out for the 2016 fiscal year.
Under Armour announced a $130 million restructuring plan in August 2017, and has cut almost 2% of its workforce. This move was a result of the company trying to dominate different segments of the sports performance category, and the lack of focus meant that the company was drumming up higher sales at the expense of profits. For 2017 and 2018, Under Armour booked restructuring and impairment charges of $124 million and $183.1 million, respectively.
As if those weren't bad enough, the company had announced yet another 2020 restructuring plan earlier this year to further reduce its cost base, and address the effects of COVID-19. For the first half of 2020, $475 million had already been incurred, which deepened Under Armour's net loss to $773 million. More of these charges could be around the corner, as the original restructuring plan had budgeted for $475 million to $525 million for the full year, but this amount had already been booked in just the first half.
Nike is the clear winner
The pandemic had affected both Nike and Under Armour, with the previous quarter seeing a sales year-on-year fall of 38% for the former and 40.6% for the latter. However, Nike enjoyed a jump in digital sales of 75% during the quarter, and digital sales made up around 30% of total revenue. Under Armour, on the other hand, was actively reducing inventory purchases due to a sharp fall in demand.
Both Under Armour's founder Kevin Plank and CFO David Bergman received a notice from the Securities and Exchange Commission on accounting irregularities involving sales recognition between the third quarter of 2015 and the fourth quarter of 2016. Although no formal charges have been pressed against both men, this news casts an ominous cloud over the company.
With a robust and innovative product line-up coupled with an effective digital strategy, more consistent dividend payments, and no restructuring expenses to deal with, Nike is clearly the better choice among the two companies.