Under Armour (UA 1.98%) (UAA 1.80%) was once hailed as the "next Nike (NKE -1.55%)". But over the past five years, Under Armour's stock tumbled about 60% as Nike's stock more than doubled.
Investors lost faith in Under Armour as it lost ground to Nike and Adidas (ADDYY 0.04%), missed its own long-term growth targets, and alienated customers with poorly received designs. Meanwhile, Nike captured more customers by expanding its direct-to-consumer channel and launching fresh new products.
Nike has clearly been the stronger investment, but some contrarian investors might be thinking about taking a chance on Under Armour. I'll explain why that's a terrible idea, for five simple reasons.
1. Nike is growing much faster
Nike and Under Armour both struggled last year as the pandemic disrupted their supply chains and closed down their retail stores. But Nike's business has recovered much faster than Under Armour's.
Nike's revenue declined 4% in fiscal 2020, which ended last May, as its earnings dropped 36%. However, Nike reopened most of its stores in the first quarter of 2021, and its revenue and earnings rose 4% and 11%, respectively, in the first half of the year.
Nike expects its growth to accelerate in the second half of the year, and analysts expect its revenue and earnings to rise 16% and 89%, respectively, as the pandemic passes and its business stabilizes. In fiscal 2022, they expect its revenue and earnings to rise another 11% and 28%, respectively.
Under Armour's revenue rose 1% in fiscal 2019, which aligns with the calendar year, and it generated a slim profit, compared to a loss in 2018. But in the first nine months of 2020, UA's revenue tumbled 20% year-over-year as its bottom line slipped into the red again.
UA expects its revenue to decline by a high-teen rate for the full year, with declines in both its domestic and overseas markets. Analysts expect UA's revenue to drop 18% this year with a net loss. For fiscal 2021, analysts expect UA's revenue to rise 13% with a slim profit.
2. Stronger direct-to-consumer sales
Nike's rapid recovery was buoyed by its strong direct-to-consumer (DTC) sales. Its DTC sales grew 32% year-over-year to $4.3 billion, or 38% of its total revenue, last quarter. UA's DTC sales only rose 17% year-over-year to $540 million, or 39% of its top line, in its latest quarter.
The healthier growth of Nike's DTC channel, which is supported by its e-commerce platform and brick-and-mortar stores, reduces its dependence on third-party retailers, many of which are still reeling from the pandemic. Its physical stores also buoy its brand recognition.
3. Superior brand appeal
In a Canaccord Genuity survey regarding athletic apparel brands in 2019, Nike ranked first in innovation, fashion, and purchase intent. Adidas ranked second in all three categories, while Under Armour ranked third.
The study claimed Nike was pulling both men and women away from Under Armour and Adidas. It also noted that UA's waning appeal among higher-income shoppers was "disconcerting", especially if it wanted to "maintain its premium positioning" alongside Nike and Adidas.
Nike also remains far ahead of Under Armour in the teen market. In Piper Sandler's latest "Taking Stock with Teens" survey, Nike was the most popular footwear brand, followed by VF Corp's Vans and Adidas. Under Armour didn't even crack the top five.
4. No leadership and accounting problems
Under Armour's founder Kevin Plank abruptly stepped down as the company's CEO at the beginning of 2020. A few months later, the company disclosed an SEC probe into allegations that it inflated its revenue by dumping its inventories into off-price channels throughout 2015 and 2016. The probe has yet to be resolved.
Nike also brought in a new CEO, John Donahoe, in early 2020. But hiring Donahoe, a tech executive who previously led eBay, was far less controversial than Plank's departure from UA, since it complemented the growing importance of Nike's e-commerce business and didn't coincide with any accounting troubles.
5. Nike is actually the cheaper stock
Nike trades at just over 50 times forward earnings. That valuation is a bit high, but its resilience throughout the pandemic, evergreen brand appeal, and robust growth rates all justify that slight premium.
Meanwhile, both classes of Under Armour's stock trade at over 100 times forward earnings. Those P/E ratios might cool off over the next few years, but UA's stock will likely remain pricier than Nike's.
Stick with the established winner
Under Armour won't disappear anytime soon, but it will struggle with the anemic growth of its core North American business, competitive pressure from Nike and Adidas, and tepid brand appeal for the foreseeable future. There's simply no reason to believe UA can catch up to its larger rival anytime soon.