It's hard not to like Under Amour (NYSE:UAA). The brand has grown its sales and earnings in a difficult space, has made sporting equality one of its major causes, and has blurred the lines between technology and apparel. On top of that, it has given investors a magnificent return, with shares up 60% in the last 12 months and 720% in the last five years.
With that background, you might be tempted to think of Under Armour as the be-all and end-all of apparel manufacturing, but this isn't a one-size fits all operation. When looking 10 years-20 years down the road, I can easily think of one manufacturer that I'd much rather own.
Superstar status defined
In any discussion about Under Armour versus the competition, we need to talk a little bit about size. Under Armour is like a Heisman winner -- on his way up the ladder, ready to change the world, full of success and potential. On the other hand, Nike (NYSE:NKE) is like 13-time Pro-Bowler, Jerry Rice. There's certainly no shame in being a Heisman winner, but there's something more to achieving a lifetime of success like Rice did.
In its last fiscal year, Under Armour generated $2.3 billion in revenue, which trickled down to $1.50 in earnings per share. Meanwhile, Nike's revenue came in at $27.8 billion, earning $2.97 per share. The reason for the gap in revenue is two-fold. First, Under Armour is simply a newer business, with less market share than Nike. Second, Nike is a worldwide brand, while Under Armour is a North American company. Of that $2.3 billion, just 6% came from outside North America.
Nike's size means that it not only earns more, but it also brings in a massive free cash flow, which gives the company more flexibility in its operations. Looking again at the last fiscal year, Nike's free cash flow topped $2.1 billion, while Under Armour generated just $32.2 million.
There's more to success than size
Let's call the dead horse of size kicked, at this point. The reason that I'll take Nike over Under Armour isn't just that it's a bigger company -- it's what that allows Nike to do. Look at this chart of year-over-year revenue growth and two things should jump out. First, Under Armour is growing at a much faster clip since it's still in its infancy. Second, during the crash -- highlighted in red here -- Nike fared much better than Under Armour, with growth taking a dip instead of a fall.
That's because Nike has the ability to shift its focus from North America, or running, or football to any other spot in its wheelhouse. Under Armour's growth is often pinned on a handful of products and lines, giving it less flexibility when chaos comes calling.
Looking back at Nike's reaction to the crisis, CEO Mark Parker said something that sums up Nike position. In May 2009, on the fourth quarter earnings call, Parker said, "Looking back at the past 12 months, one of the most important challenges we've faced was defining what success means for both the near and long term. For many companies, success was defined as simply surviving. As we've said in the past, we intend to do more than just survive -- we plan to emerge from this downturn competitively stronger."
Nike wasn't worried about survival, but was looking ahead at how it could use the downturn to make itself a better business down the road. That success comes from Nike's vast network of distribution and its huge brand name, which Interbrand valued at $19.8 billion this year. While Under Armour is reliant on the American market, Nike earned 53% of its revenue outside of North America in the last fiscal year.
Nike can ride through the storms like a battleship, while Under Armour's yacht gets tossed on the waves.
Cash for me, cash for you
The final reason I'm picking Nike over Under Armour is that Nike is going to give me money. Dividends are part of the Nike lifestyle, and the business paid out $799 million last fiscal year, while buying back $2.6 billion worth of shares. This is a company intent on giving back to its investors, something that Under Armour isn't able to do yet, due to its need for growth. That means that I sleep soundly knowing that even with the bumps in the market, Nike is looking out for my interests.
None of this is to say that Under Armour is a bad business. I love the brand I think it's got the fundamentals in place to make it in the big leagues. For now, though, I'm putting my money on a company that's already paid its dues and that I know can step up when things are looking down. Nike is my long term apparel bet.