Nike (NKE 0.19%) is the undisputed leader in athletic apparel and footwear with a lead so long it eclipses any challenger's ability to catch up in the near future.
However, that doesn't mean smaller companies in this industry don't have great growth opportunities too. Nike may be an excellent investment choice thanks to its industry leadership and valuable brand, but other companies are growing more quickly.
Consider Skechers (SKX 11.20%). You may not realize this budget shoe brand is expanding its store count, capturing market share, and gaining in popularity. Let's see why it's winning customers and giving Nike a run for its money.
Moving forward, despite inflation
Consumer goods companies and retailers have been hit hard by inflation -- but not equally. Despite the grim environment, Skechers posted an 8% year-over-year sales increase in the third quarter as earnings per share (EPS) rose 69% to $0.93. Direct-to-consumer sales stood out with 24% growth.
Those results easily outshine the low to mid-single digit growth that Nike reported across those same metrics in its fiscal 2024 first quarter (ended Aug. 31).
Short-term, long-term, or both?
Something to consider is that Skechers is gaining market share not despite inflation but because of it. Customers are looking for budget alternatives right now, but does that mean a strong economy will see them switch back to competitors like Nike?
Not necessarily. While there's likely to be some churn, Skechers is building its brand with capsule collection collaborations featuring brand ambassadors like Martha Stewart and Snoop Dogg. Meanwhile, the company is establishing relationships with consumers through its direct-to-consumer channels to keep them engaged.
Profitability is soaring
Another matter to consider is that despite its superior revenue growth in the third quarter, its operating margin lags behind Nike's.
Skechers may be enjoying growing popularity and customer loyalty, but its brand still doesn't have the reach or premium positioning that Nike does. That allows the latter to enjoy stronger profitability, as you can see below.
Data by YCharts.
However, what should also stand out in the above chart is the narrowing gap between the two companies' operating margins. Management views Skechers' direct-to-consumer channels and international markets as the biggest opportunities to make margin improvements going forward. Nike, on the other hand, has been grappling with bloated inventory, which has taken a toll on its profitability.
It can give your money a nice run
Considering its strong momentum, you might be surprised to learn that Skechers stock trades at just 14 times trailing-12-month earnings -- not even one-half of the 32 times earnings Nike stock is valued at as of this writing. Skechers looks like a classic example of an undervalued stock that can extend its streak of market-beating returns.
