Apparel companies sell their products through multi-line retailers and also over the Internet. In search for higher margins, apparel brands try to invest in company-owned retail, outlet and online stores. Due to high competition, companies also see international expansion as an alternative channel for growth. I should highlight that the S&P Footwear Index increased 47.66% year to date, well above every benchmark. With this promising outlook, let's take a look at two companies and see which one is doing better, and thus stands as the best investment.
The World´s Leading Athletic Brand
Nike Inc. (NKE, Financial) is the world's largest seller of athletic footwear and apparel with presence in more than 160 countries worldwide. The company operates in North America (which contributed 46% of total NIKE Brand sale in fiscal 2013), Western Europe (18%), Central and Eastern Europe (6%), Greater China (11%), Japan (3%) and Emerging Markets (16%).
Nike's Success: Product Innovation, Marketing and Distribution Strategies
Innovation in shoe production technologies continues to drive strong revenue growth. Also, marketing campaigns and recognized athlete's image, build credibility to new innovations. Regarding distribution strategies, the “futures program,” permits to order products in advance of delivery, with the commitment that those orders will be delivered at a fixed price.
Underperforming Brands
Last year the company announced plans to divest its Cole Haan and Umbrobusinesses, which reported revenues of $797 million and losses before interest and taxes of $43 million in fiscal year 2012. The company recently completed those sales and recorded an after-tax gain on the sale of $231 million.
Mitigating Exposure
The company is seeking long-term opportunities in countries such as China, where it has a strong market penetration. The firm achieved continued margin expansion and is positioning well for improved profitability and sustained growth. Revenues of more than $2.4 billion in 2013, speak for themselves.
Valuation
In terms of valuation, the stock sells at a trailing P/E of 25.7x, trading at a premium compared to an average of 17.1x of the industry. Analysts’ expectations imply a forward P/E of 21.47. To use another metric, its price-to-book ratio of 6 indicates a premium versus the industry average of 1.5 and the price-to-sales ratio of 2.7 is above the industry average of 0.85.
Dividend-payment history affirms its commitment to maximize shareholder wealth through shares repurchases. During the quarter, the company bought back 8.4 million shares for about $526 million. As of Aug. 2013 the Buyback Ratio of Nike is 2.5 and higher than 83% of the companies in the Footwear & Accessories industry.
A Leading “Yoga Brand”
Lululemon Athletica Inc. (LULU, Financial) together with its subsidiaries, designs, manufactures and distributes athletic apparel and accessories for women, men and female youth. The company is one of the world's leading suppliers of yoga-inspired clothes.
International Expansion
The company received licenses in China and is planning to open at least three stores in this country by the end of the year. In Europe, the company enters in Germany and UK and it also opened stores in Asia following the idea of expansion in an international basis. But not all are good news; the company announced that CEO Christine Day is stepping down and the stock did not react well to this.
Losing Ground
The firm can lose market share to its yoga competitor Gap Inc. (GPS, Financial) which is implementing a campaign to expand plus-size offerings. We have to take into account that Lululemon does not own any patents to protect production so any rival can reproduce its products, and this become an important risk. Moreover, bad news affects the firm this year, when a number of complaints appeared against the quality of some of its pants in early 2013. As a matter of fact, the chief product officer left the company in April. In the next chart we can see the price evolution year to date.
Its P/E multiple on a trailing-12 month basis is 37.5 and the forward P/E multiple is 27.96.
Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. Both companies stand above the industry mean of 9.1%. Nike has a ROE of 22.3, while Lululemon´s ROE of 30.5 considered good.
Final Comment
Lululemon has shown robust revenue growth and expanding profit margins over time. However, continuity is always important and recent news make Wall Street doubt about the company’s future. Other strong brands could gain that market opportunity and outperform projected results.
On the other hand, Nike continues to outperform its peers through its product innovations, marketing and distribution strategies, expansion in promising countries, as well as divestitures of underperforming assets.
For a long-term perspective, both companies are a buy, but I would advise fundamental investors to consider adding Nike to their portfolios as it seems to be a more attractive, safer option. Hedge fund managers have also been active in the company. Hedge fund gurus like Jim Simons, Steven Cohen, Joel Greenblatt and Jean-Marie Eveillard have invested in it.
Disclosure: Damial Illia holds no position in any stocks mentioned.
The World´s Leading Athletic Brand
Nike Inc. (NKE, Financial) is the world's largest seller of athletic footwear and apparel with presence in more than 160 countries worldwide. The company operates in North America (which contributed 46% of total NIKE Brand sale in fiscal 2013), Western Europe (18%), Central and Eastern Europe (6%), Greater China (11%), Japan (3%) and Emerging Markets (16%).
Nike's Success: Product Innovation, Marketing and Distribution Strategies
Innovation in shoe production technologies continues to drive strong revenue growth. Also, marketing campaigns and recognized athlete's image, build credibility to new innovations. Regarding distribution strategies, the “futures program,” permits to order products in advance of delivery, with the commitment that those orders will be delivered at a fixed price.
Underperforming Brands
Last year the company announced plans to divest its Cole Haan and Umbrobusinesses, which reported revenues of $797 million and losses before interest and taxes of $43 million in fiscal year 2012. The company recently completed those sales and recorded an after-tax gain on the sale of $231 million.
Mitigating Exposure
The company is seeking long-term opportunities in countries such as China, where it has a strong market penetration. The firm achieved continued margin expansion and is positioning well for improved profitability and sustained growth. Revenues of more than $2.4 billion in 2013, speak for themselves.
Valuation
In terms of valuation, the stock sells at a trailing P/E of 25.7x, trading at a premium compared to an average of 17.1x of the industry. Analysts’ expectations imply a forward P/E of 21.47. To use another metric, its price-to-book ratio of 6 indicates a premium versus the industry average of 1.5 and the price-to-sales ratio of 2.7 is above the industry average of 0.85.
Dividend-payment history affirms its commitment to maximize shareholder wealth through shares repurchases. During the quarter, the company bought back 8.4 million shares for about $526 million. As of Aug. 2013 the Buyback Ratio of Nike is 2.5 and higher than 83% of the companies in the Footwear & Accessories industry.
A Leading “Yoga Brand”
Lululemon Athletica Inc. (LULU, Financial) together with its subsidiaries, designs, manufactures and distributes athletic apparel and accessories for women, men and female youth. The company is one of the world's leading suppliers of yoga-inspired clothes.
International Expansion
The company received licenses in China and is planning to open at least three stores in this country by the end of the year. In Europe, the company enters in Germany and UK and it also opened stores in Asia following the idea of expansion in an international basis. But not all are good news; the company announced that CEO Christine Day is stepping down and the stock did not react well to this.
Losing Ground
The firm can lose market share to its yoga competitor Gap Inc. (GPS, Financial) which is implementing a campaign to expand plus-size offerings. We have to take into account that Lululemon does not own any patents to protect production so any rival can reproduce its products, and this become an important risk. Moreover, bad news affects the firm this year, when a number of complaints appeared against the quality of some of its pants in early 2013. As a matter of fact, the chief product officer left the company in April. In the next chart we can see the price evolution year to date.
Its P/E multiple on a trailing-12 month basis is 37.5 and the forward P/E multiple is 27.96.
Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. Both companies stand above the industry mean of 9.1%. Nike has a ROE of 22.3, while Lululemon´s ROE of 30.5 considered good.
Final Comment
Lululemon has shown robust revenue growth and expanding profit margins over time. However, continuity is always important and recent news make Wall Street doubt about the company’s future. Other strong brands could gain that market opportunity and outperform projected results.
On the other hand, Nike continues to outperform its peers through its product innovations, marketing and distribution strategies, expansion in promising countries, as well as divestitures of underperforming assets.
For a long-term perspective, both companies are a buy, but I would advise fundamental investors to consider adding Nike to their portfolios as it seems to be a more attractive, safer option. Hedge fund managers have also been active in the company. Hedge fund gurus like Jim Simons, Steven Cohen, Joel Greenblatt and Jean-Marie Eveillard have invested in it.
Disclosure: Damial Illia holds no position in any stocks mentioned.
