|New Threads Only:|
|New Threads & Replies:|
Forum List » Value Ideas and Strategies|
Share and discuss value investing ideas and investing strategies.
Why You Should Invest in This Athletic Giant
Posted by: Patricio Kehoe (IP Logged)
Date: October 28, 2013 10:22PM
The footwear and accessories market is an industry that constantly faces the challenge of innovation and aversion to changes in consumer preferences. This can be especially tough in the athletic sector, where fashion meets functionality. And it’s no easy challenge when looking at casual footwear for a young target. In the race for industry leadership, market giant Nike Inc. (NKE) faces teenager’s beloved Skechers USA Inc.(SKX).
A Popular Brand with Impulsive Customers
Skechers is known for designing trendy, casual footwear aimed at young adults. The company’s products can be purchased in U.S. department stores, and in over 325 company-operated retail stores, as well as online. The firm also has a second revenue source in third-party retailers like Zoo York, Marc Ecko or SoHo Lab, who carry their footwear lines.
Skechers profits from a broad product mix, as well as healthy brand recognition through aggressive marketing strategies with celebrities. However, the firm is vulnerable to the high paced fashion trends of its capricious consumer base. Nevertheless, when sales hit a downward spiral, after the 2009 financial crisis, and the 2011 toning line fiasco, Skechers showed strong recovery instincts. They hit a jack-pot idea by launching the “fusion” line, blending athletic footwear with a European style. In addition to their new GOrun and GOwalk performance lines, the “fusion” reaches out to a larger customer base, offering an attractive product at a low price.
Although the company’s presence in national retailers provides them with additional brand exposure, possibly leading to further growth, they face a challenging operating environment. Volatile consumer spending, as well as fierce competition from similar brands, such as Timberland and K-Swiss, could put the brakes on the firm’s sales. Nonetheless, the firm’s focus on innovative products, additional store openings, and new international distribution agreements could lead to a large revenue boost.
With joint ventures in China, Singapore, Canada and Chile, Skechers seems ready to take on the competition and increase their global reach in the footwear market. However, purchasing this stock would be unwise, given the current whopping 203% price premium relative to the industry average. Although I feel bullish regarding the firm’s future, I would hold on this stock until it is available at a lower price.
A Gold Medal for the World’s Most Famous Athletic Designer
Nike is the world’s largest designer and wholesaler in the athletic footwear and apparel industry. Known by its endorsement deals with athletes like Cristiano Ronaldo, or LeBron James, this company has revolutionized the market for over forty years. Its decade long expansion has led the firm to ownership of 50,000 retail accounts, distributed amongst company stores and independent licensees in over 170 countries. This network has helped create a web of diversified revenue income from all over the globe, with a steady 40% deriving from North America.
But apart from Nike’s intelligent distribution strategy, the company’s focus on innovating shoe production technologies has earned it a spot as the dominant market leader. Concentrating on higher-end performance footwear and clothing not only gives this firm a competitive industry advantage, but also broadens their customer base. A $3 billion budget for marketing resources and endorsement deals adds on to the company’s credibility, making them a first choice brand.
However, despite having a wide economic moat and a strong balance sheet, there are some possible hazards down the road. Nike faces strong competition from Adidas, which has the upper hand in soccer-dominated emerging markets. Also, with international expansion as the firm’s main growth engine, new trade barriers, or an increase in import costs, could negatively affect profitability. In addition, the company is exposed to the political and economic conditions of the countries where they manufacture their products, such as China, Indonesia or Thailand.
Nevertheless, I consider Nike to be a safe and smart investment in the long term. With over $2.4 billion revenue in China alone, this footwear and apparel giant is more than just athletic. A portfolio of globally established urban brands, including Converse, Chuck Taylor, and All Star, gives this company the upper hand over its industry peers. Although the stock is currently trading at a price premium of 50% relative to the industry average, I feel very optimistic about the firm’s future because sales are bound to increase as the world cup 2014 approaches. Investment guru Frank Sands felt the same, and recently added another 20% to his already acclaimed 20 million shares.
Running Instead of Posing
As the race for the number one market leader ends, it’s clear to me that Nike is the winner. Skechers is a very popular brand among young adults, and its expansion has been successful until now. However, Nike enjoys a wide economic moat that is out of reach for Skechers. The company’s trajectory in product innovation and its monstrous marketing budget makes it the ultimate industry leader, and therefore, the safer long term investment.
Disclosure: Patricio Kehoe holds no position in any stocks mentioned
Stocks Discussed: NKE, SKX,