How Nike Protects Its House

"Just Do It." That Nike (NKE 1.61%) slogan in 1988, combined with the signing of Michael Jordan four years earlier, were key growth drivers for the brand.

Many companies will have a catchy slogan or sponsorship, but later fade away, only allowing management to reminisce about the time when they stood at the peak of the industry. Nike doesn't fall into that category. Rather, Nike has continued to build on its success. 

Nike vs. Under Armour
"We must protect this house." If that sounds familiar, it's because you likely saw the commercial on television between 2005 and 2008. It featured several fit athletes sporting Under Armour (UA 0.64%) and shouting the phrase, which pertains to protecting one's home field in a sporting event.

This commercial made Under Armour a household name, it seemed that the new Nike was among us. While Under Armour is indeed a competitive threat to Nike, Nike has maintained its leadership role throughout the industry. For instance, according to Piper Jaffray, upper and average-income teens still prefer Nike over Under Armour and Adidas (ADDYY +0.02%).

Brand Preferences (U.S.):

These numbers greatly favor Nike. Let's keep in mind that this only pertains to upper and average-income teens, not low-income teens, kids, or adults. If you look at the big picture, Under Armour is doing just fine in regards to growth.

First consider Under Armour's top-line performance over the past several years:

NKE Revenue TTM data by YCharts

Nike and Under Armour have both been consistent on the bottom line:

NKE EPS Diluted TTM data by YCharts

All of this is positive news for Under Armour, but Nike is still a much larger company, sporting a $64.85 billion market cap and $5.58 billion in cash, versus Under Armour's market cap of $8.22 billion and cash position of "just" $223.84 million. Therefore, Nike will have a lot more ammunition for marketing, athlete sponsorships (like LeBron James), innovation, acquisitions, and international expansion. This should lead to Nike remaining the market leader. 

Furthermore, Nike is trading at 21 times forward earnings. Under Armour is trading at a lofty 42 times forward earnings. This rich valuation is often the biggest gripe potential investors have with Under Armour. But based on the company's rapid and continuous growth, this valuation might be justifiable. The current FY 2013 EPS analyst estimate is $1.45, and $1.84 in FY 2014 (versus $1.21 in FY 2012). 

Under Armour is clearly exciting, and it expects fiscal year 2103 revenue to grow between 22%-23%, up from its previous guidance of 21%-22%. That said, Nike yields 1.20%, whereas Under Armour doesn't pay a dividend.

Nike vs. Adidas
"My Adidas." In 1986, Run DMC took Adidas from the basketball court to the mainstream with its immensely popular rap song.

Adidas is much closer to Nike in size than Under Armour, with a market cap of $23.16 billion. However, Adidas has lost market share to Nike in its own market for soccer (or football). Also, Nike continues to expand overseas, which has the potential to lead to market share gains. 

As a well-managed company, Adidas doesn't plan to sit around and watch itself lose market share to competitors. As a wholesaler, Adidas has 40,000 partners worldwide. As of this year, the company has 2,400 retail stores which showcase the Adidas and Reebok brands to consumers. This is especially the case in Russia and the Middle East, where no extensive sporting goods networks exist. Adidas also aims to grow online. 

Despite the potential for Adidas, it's not as impressive as Nike on the top line, bottom line, or in key metric comparisons:

Nike goes beast mode
Seattle Seahawks' running back, Marshawn Lynch, sometimes falls into a zone and goes into beast mode. In other words, when defenders attempt to tackle the 215-lb. running back, they're greeted with an elbow to the chin, a helmet to the sternum, a stiff-arm to the side of the head, a knee to the groin, or whatever else it takes for Lynch to gain a few extra yards.

Nike is similar in this sense. Despite competitive threats attempting to take Nike down, it only uses these obstacles as motivation. For example, thanks to innovation and geographic expansion, Nike now expects FY 2017 revenue to come in at $36 billion, much higher than the $25.31 billion Nike delivered last year.

Choose your pace
If you're looking for top-line growth and high potential (risk included due to valuation), consider Under Armour. If you're looking for slow, steady, and safe while collecting dividend payments, consider Nike. Adidas is also a well-run company, but it's simply not as impressive as Nike.