Today, I'm following up on Reebok's success story by putting it right up alongside Nike to see which company comes out on top financially. We'll examine six things: margins, sales growth, Flow Ratios, cash compared to total debt, free cash flow margins, and valuation. When we're done, we'll tally up our results and declare a winner.
Margins, margins everywhere
Let's first compare gross, operating, and net margins for both companies.
Nike ReebokGross margin 40.6% 37.35%Operating margin 10.26% 6.25%Net margin 6.76% 4.3%
Nike's got the edge here across the board. But the game's not over yet. We'll move on to sales growth next.
In Nike's most recent quarter, overall sales grew 6.22% to $2.4 billion. Through the first nine months of its fiscal year, revenues for the sneaker hawker are up 6.9% to $7.7 billion. That's an improvement from the 4% sales growth generated in fiscal 2002, and better than the 5.5% sales growth from fiscal 2001.
What's interesting about Nike's sales growth is that even though the company's finding its shelf space squeezed at one of its biggest domestic footwear distributors, its international business is booming. Obviously, the U.S. athletic footwear market is crucial to Nike, and it's working to find replacement distribution points for the lost Foot Locker space. But at the same time, it's keying in on its huge international business and has been making strides overseas.
Reebok, on the other hand, is in the opposite position. As a smaller company, and one intent on rebuilding its brand and returning to glory, it's focusing a great deal of energy on its U.S. footwear sales. And for good reason, given the success it's found with new paramour Foot Locker.
Reebok's total revenues for its first quarter increased 8.5% to $798 million. Sales in 2002 improved 4.5% to $3.1 billion. That's roughly the same sales growth rate the company experienced in 2001.
It's hard to declare a clear winner here. Reebok's looking strong leading into its new fiscal year, but Nike's managing to grow its overall sales despite tough stateside conditions. Given Reebok's smaller size, though, generating faster sales growth in the future should be easier for it than for Nike.
How do both companies' Flow Ratios measure up? How do they manage their working capital? Which company is more efficient? Ideally, the number will be 1.25 or less.
Nike's most recent Flow Ratio is 2.72. Ouch. That's worse than the 2.64 it recorded at the close of its fiscal year in May 2002, but is significantly better than the 3.27 reading from the third quarter of last year. Reebok's Flow Ratio from its first quarter stands at 2.27 - not so hot, but better than Nike's. In the same period last year, Reebok's Flowie was about the same, at 2.28.
Both Nike's and Reebok's hefty Flow Ratios reflect the inventory-heavy nature of their businesses. Reebok's inventory channel at the moment is crammed full of gear for its NBA and NFL licensing agreements, for example. Even so, Reebok wins this round.
Cash vs. debt
Let's take a look now at how Nike and Reebok stack up when it comes to cash and debt. A cash level 1.5 times higher than total debt is what we're shooting for.
As of Feb. 28, 2003, Nike's cash balance was $443.2 million. The company had total debt of $748.4 million, so it's obviously going to miss the mark on this one. Reebok gets much closer with 1.3 times as much cash as total debt.
Free cash flow margin
The Rule Maker guys used a metric called the "Cash King Margin," which is similar to a net margin except that instead of basing it off net income, you use free cash flow. Both Nike and Reebok are consistently free cash flow positive, so which one is producing a better margin here?
Nike's 2002 free cash flow margin tallied up to 8%. It was 2.57% in 2001 and 3.11% in 2000. Through the first three quarters of this year, its free cash flow margin is 3.76%.
For 2002, Reebok's free cash flow margin was 6.28%. The company turned out a 4.97% margin in 2001 and 5.37% in 2000. With the exception of Nike's anomalous 8% last year, Reebok has consistently produced better free cash flow margins.
This underlies the reason that we like focusing on free cash flow more than earnings, too, since as you'll remember, Reebok's net margins were less than Nike's. However, with free cash flow margins more than its net margins, it's apparent Reebok's making and hanging onto the green.
We're nearing the finish line here. Let's throw out some quick and dirty valuation measures and see which company's the better bargain.
Reebok is trading at a P/E of about 15, and a forward P/E of 13. More importantly, its P/FCF is around 10.7. Nike, on the other hand, is more expensive, at a P/E of 20, a forward P/E of 17, and a P/FCF of 19.42.
Declaring a winner
Let's check the scoreboard now and see who's ahead. Reebok outplays Nike in five of our six categories, if we give it the edge in sales growth. Even if we don't, it's still our clear winner.
Given that Reebok's business momentum seems to be improving with each quarter and every new product launch, the game should continue to be very interesting from here. Reebok is indeed back in a big way. Watch out, Nike.