Under Armour (NYSE:UAA) is a rapidly growing company in the athletic-apparel retail space, which has traditionally been dominated by Nike (NYSE:NKE). The two companies have both been wildly successful since their respective IPOs, the former going public in 2005 and the latter in 1980. In many ways Under Armour is following the road map laid out by Nike in an attempt to usurp the market leader.
Both companies have visionary leaders who sold their company's first products themselves.
Phil Knight started the company that would eventually become Nike by selling modified running shoes out of the trunk of his car at track meets in 1964. Under Armour founder Kevin Plank in 1996 began working on the moisture-wicking shirt that would become synonymous with the Under Armour brand. He gave some to his football teammates, then to equipment managers he met on the road, and finally began selling them personally out of the trunk of his car.
Both companies have successfully used athlete marketing to build their brand.
Nike famously signed basketball player Michael Jordan to a sneaker deal in 1984. Thirty years later it still controls well over 90% of the U.S. basketball shoe market. In 1995, Nike signed Tiger Woods to a contract -- three years before Nike Golf, which sold golf clubs and balls, was officially established. In 1996, the golf division, selling apparel, had revenue of about $120 million. In 2014, Nike Golf had revenue of $789 million.
Under Armour has recently had the Midas touch, with endorsement deals with two athletes in particular. Stephen Curry is the reigning NBA MVP and member of the current NBA champion Golden State Warriors. He was signed when Nike chose not to match Under Armour's offer. Plank is obviously thrilled with how things have gone so far, saying recently that Curry branded products are "going to help elevate what was about a $100 million basketball business. And you know our goal is building a billion-dollar basketball brand."
Under Armour also signed an amateur golfer named Jordan Spieth to a four-year deal, then earlier this year re-signed him to a 10-year contract, and is now attempting to build a golf brand around the 22-year-old who has already won two of golf's four major championships this year.
The companies are at different phases in their growth cycle, but their profitability ratios are extremely similar.
Under Armour is growing much faster than Nike. Its five-year average revenue growth and earnings-per-share growth are 29.21% and 32.80%, respectively, compared to 7.71% and 14.41% for Nike. This growth is reflected in the fact that Under Armour currently trades for 59.5 times forward earnings while Nike comes in at 26.8 times. These numbers make sense given the size of the two -- Nike is over five times larger by market cap -- and give investors the opportunity to invest in great companies with different risk/reward profiles.
The two companies' gross and operating margins are quite similar. Under Armour's having metrics close to Nike's here is a good sign for the future of the business. This means its products can be marked up by a similar amount to those of the industry leader, which has a multidecade marketing advantage on the "upstart."
Different tax rates cause the biggest relative hit to Under Armour's net margin and ROA.
Nike's trailing-12-month tax rate is 23.59% while Under Armour's is a whopping 39.47%. This difference causes the gap in EBT margin between the two companies -- 13.44% for Nike and 10.49% for Under Armour -- to further widen when looking at net margin. Nike's net margin comes in at 10.27% while Under Armour's, because of its much higher tax rate, drops all the way to 6.35%. Because both companies have nearly identical asset turnover rates this equally affects the return on assets for each.
Nike looks like a buy; Under Armour has more upside, and more risk.
Nike is a wonderful company that defined the athletic retail space, pays a small dividend, and still has a large growth runway ahead. If Under Armour can reduce its effective tax rate in the years to come, while also continuing to grow revenue and protecting its gross margin, I believe it will outpace Nike in the market. However, its frothier valuation, smaller size, and reliance on Plank make it a riskier investment than its more mature competitor. I own shares in both companies and plan to hold them for the foreseeable future.