Nike (NKE -0.18%) has reigned supreme over the athletic-footwear market for decades for one main reason: its innovative prowess. Innovation is at the heart of almost everything Nike does, from new product development to consumer interaction. It is the company's biggest defense against constantly encroaching and increasingly aggressive competitors.
Several of the company's recent moves illustrate Nike's success in innovation perfectly. Accordingly, Nike should be able to keep smaller competitors like Under Armour (UAA 1.03%) at bay for the foreseeable future.
Digital Innovation
For a company with such a massive global footprint and solid industry positioning as Nike, innovation is no longer necessary. Company management could simply churn out similar products every year and still generate huge revenue. However, management at Nike has proven numerous times that it is not content to rest on its laurels.
Nike President and Chief Executive Officer Mark Parker explained it best in the company's most recent earnings release: "Innovation is at the heart of everything we do. I continue to see expanding opportunities for Nike to reach new heights of product and performance innovation." Parker went on to explain, "Our innovation pipeline has never been deeper or stronger than it is today."
One of the company's most important but often overlooked innovations is its digital platform, which includes Nike's rapidly growing e-commerce business and the company's digital products and services.
Nike's popular e-commerce platform delivered 33% revenue growth in the latest quarter. Incredibly, the segment only represents 15% of Nike's total direct-consumer revenue and still has substantial room to grow.
On the digital-product front, Nike launched the latest version of Nike+ FuelBand. The FuelBand SE, built with numerous enhanced features, is the company's revolutionary activity tracker. Nike has had so much success with wearable technology in the past that smaller competitor Under Armour recently purchased MapMyFitness to compete in the segment.
Product innovation
Besides digital initiatives, Nike also continues to innovate its signature footwear line. Most recently, Nike released its new soccer shoe, the Magista football boot. The boot's major advancement includes a Nike Flyknit upper section, which provides closer ball feel and touch, rotational traction, and a sock-like fit.
CEO Parker explained, "Our aim at [Nike] has always been to meet the athlete's particular performance demands and amplify his unique set of skills. Magista inherits that transformative history of design and innovation and supercharges it."
Also, Nike recently made headlines when it announced that it would bring the shoes worn by fictional character Marty McFly of the popular "Back to the Future" movie to retail markets. The power-lacing shoes, which of course tie laces themselves, will arrive in 2015.
Nike's impressive product announcements are coming at a perfect time. Smaller competitor Under Armour, which has struggled in footwear over the years, seems to have finally found its groove concerning sneakers. Under Armour's Apollo Speedform product is being met with positive reviews. I myself bought a pair and find them great for running.
Under Armour Executive Vice President of Marketing Matt Mirchin explained at the company's unveil of the Apollo Speedform: "We pushed industry boundaries to deliver breakthrough innovation in footwear that provides performance that runners need."
Innovation equals growth
For both Nike and Under Armour, innovation is translating into growth. The following is a breakdown of the two companies' growth in 2014:
| Company | Revenue Growth 2014 | EPS Growth 2014 |
|---|---|---|
| Nike | 9.6% | 11.2% |
| Under Armour | 23.7% | 23.3% |
*Nike's fiscal years ends in May
Although Nike's growth is significantly slower than Under Armour's, it's still impressive considering Nike is a much larger and more mature business.
However, Nike's slower growth means cheaper valuation. Nike's forward P/E of 22.4 is significantly cheaper than Under Armour's 49.9. Additionally, Nike pays a dividend of $0.96, equal to a yield of 1.2%, while Under Armour does not pay a dividend.
Bottom line
There is a reason Nike has remained dominant in the athletic-footwear landscape for decades: The company's constant innovation has meant competitors are always playing catch up.
Although the aggressive Under Armour is probably a long-term global competitor, Nike's significant brand power and industry positioning means that the sneaker giant can most likely keep competitors at bay for the foreseeable future.
