The sports apparel sector is offering interesting alternatives for investors, including companies with rock solid competitive advantages, abundant growth opportunities or big potential for recovery. Let´s take a look at Nike (NYSE:NKE), Under Armour (NYSE:UAA) and Lululemon (NASDAQ:LULU) and try to find out what the best play may be for investors.
Nike: the undisputed champion
When it comes to brand differentiation, international reach and competitive strengths, Nike is the undisputed heavyweight champion in the global sports apparel and footwear industry. Through decades of sponsoring the most renowned athletes in different disciplines around the planet, the Nike swoosh has become one of the most recognizable brand logos in the world.
Nike refers to marketing expenses as "demand creation expense" in its financial statements, which is quite an appropriate term in this case. A global leadership position, a reputation for quality and a strong focus on innovation provides huge advantages in terms of credibility when it comes to launching new products or entering new markets. Also, due to scale advantages and superior pricing power, Nike enjoys above-average profitability.
The company is a consistent and reliable performer: Nike has raised its dividend in each of the last 12 consecutive years, including a recently announced increase of 14% to 0.24 per share. This industry giant has rewarded shareholders with more than $15 billion in dividends and share repurchases over the last decade.
The stock doesn´t come cheap at a P/E ratio near 27, but quality is out of the question. Nike is the kind of company investors can buy for the really long term and capitalize on the opportunity to accumulate at lower prices on pullbacks that may take place down the road.
Under Armour: the contender
Under Armour is focused on high-performance athletic apparel, and the company has a strong culture of innovation when it comes to aspects like technology, materials, and designs. Products are designed to be light and provide moisture management, a signature innovation and differentiating aspect for the brand.
Under Armour doesn´t have the same scale and global reach as Nike, but the company is running from behind at full speed. Under Armour has increased revenues at more than 20% annually over the last 14 consecutive quarters, and the company has plenty of room for growth, both in the US and in international markets.
There is no slowdown in sight judging by recent financial figures: Under Armour delivered a whopping increase of 26% in revenue and 27% growth in net income for the third quarter of 2013. The company also raised guidance for the rest of the year; management is now expecting 2013 revenues of $2.26 billion, representing an increase of 23% versus 2012. Operating income is expected to grow at an even faster 25% to $260 million.
The stock trades at a sky-high P/E ratio of 59.5. However, Under Armour has abundant room for long-term growth considering its market cap of under $8.7 billion versus almost $70.6 billion in market cap for Nike. Investors looking for an aggressive growth play in the sector may want to give Under Armour some serious consideration.
Lululemon: the contrarian turnaround play
Lululemon is going through a really tough year in 2013. In March, the company had to recall 17% of the yoga pants it had in stock due to excessive sheerness. Later in June, CEO Christine Day unexpectedly announced she was leaving the company once a replacement was found, which produced another steep decline in its stock.
More recently, adding insult to injury, founder and Chairman Chip Wilson made some very unfortunate comments insinuating that women´s bodies may be to blame for the problems with the company´s products. "Frankly, some women's bodies just actually don't work", Wilson said on Nov. 5 in an interview with Bloomberg TV. This has understandably created heavy backlash and criticism against the company, and the outlook remains uncertain for Lululemon in the middle term.
On the other hand, there is plenty of negativity already reflected in the stock; Lululemon has a massive short interest ratio of almost 24% of the company´s float. If the company can avoid making any more mistakes for a while, and the new CEO manages to lead the company in the right direction, Lululemon could offer material upside potential for investors.
The stock is not particularly cheap at a P/ E ratio near 40 times earnings though, so investors should probably wait for signs that the company is getting back on track before betting on a recovery.
Nike is an undisputed industry leader with unparalleled competitive strengths and reliable cash flows distributions for shareholders. Under Armour is smaller and riskier, but it offers outstanding potential for growth. As for Lululemon, uncertainty usually creates opportunity, and there is plenty of uncertainty surrounding the company.
Like in sports, some moves are riskier than others, but the payoff can also be larger if things work out as expected. At the end of the day, the right decision to make will depend on each investor´s needs, risk tolerance and overall investment strategy.
Andrés Cardenal has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica, Nike, and Under Armour. The Motley Fool owns shares of Nike and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.