Adidas or Under Armour Inc: which are you supposed to buy and sell? Analysis and comparison of these companies’ growth rates, valuations and headwinds will answer this question for you.
Under Armour shares have plunged a mighty 22% over the year, dragged by worries about its sales slowdown, increasing costs and a more difficult rivalry with other athletic apparel makers. In this industry, Under Armour was one of the hottest growth stocks and always remained soaring.
Adidas meanwhile, was a firm that has often been dominated by both Under Armour’s robust growth and Nike’s brand strength. However, in the period when Under Armour’s shares went crashing, Adidas shares surged more than 120% at the time.
The strong sales growth during the first year of its five-year turnaround strategy had persuaded several investors that Adidas’ string of errors in the past—particularly its acquisition of Reebok that almost wiped out its money— have ceased to influence its current performance and beyond.
Adidas VS Under Armour: Sales Growth
Adidas’ sales rallied 21% yearly on a constant currency basis to $4.9 billion in the previous quarter, due to China’s 30% growth, Western Europe’s 26% growth and North America’s growth of 31%. The quarter prior, sales of the company climbed 22% on a constant currency basis and just 9% in the last year’s quarter. The firm predicts constant currency sales growth in the "high teens" for the full year, compared to 10% growth in 2015.
Adidas also anticipates reporting double-digit sales growth across all markets except the Russia/CIS region.
53% of Adidas' sales came from footwear during the first half of 2016, compared to 51% a year earlier. The company attributed the category's 27% constant currency sales growth to strong demand for running shoes being somewhat offset by softer demand for basketball shoes.
Meanwhile, despite Under Armour’s sales growing a healthy 28% yearly to $1 billion in the previous quarter, this figure also signifies a slowdown from 30% growth in the last quarter and 29% growth in the year prior quarter.
Analysts are estimating that this slowdown will continue: 21% in Q3, 22% in Q4, and 24% growth for the full year. These numbers seem quite poor compared to Under Armour’s previous growth of 32% in 2014 and 28% growth in last year.
25% on Under Armour’s sales rooted from athletic footwear during the first half of the year, compared to merely 20% in the same period in 2015. Apparel sales meanwhile, fell from 67% of revenues to 62% during the first half of last year. This change indicates that the company is depending less on its “high-tech” apparel and more on footwear—which market is overshadowed by deep-rooted companies like Nike and Adidas.
With the rising tough rivalry, Under Armour began selling its shoes at lower prices—at most 23% less than two years prior versus an average 4% price drop across the industry, according to a report by Morgan Stanley in March. But despite the price decline, Under Armour’s footwear earnings climbed 58% during the quarter on the robust sales of basketball shoes.
Adidas VS Under Armour: Margins and Profit Growth
A big concern about Under Armour is that its growing reliance on cheaper footwear is grinding down its margins and earnings. This is why its gross margin slipped 70 basis points yearly to 47.7% last quarter. Adidas' gross margin increased 50 basis points annually to 48.8% last quarter, on the other hand.
Further analyzing, since Adidas has a greater retail impression than Under Armour, it needs to spend more heavily to remain competitive. Under Armour's rather aggressive spending on prominent endorsements, marketing pushes, and a large impairment charge from the Sports Authority liquidation caused its selling, general, and administrative costs to ascend 32% annually.
As a result, Under Armour’s operating margin decreased from 4.1% in last year’s quarter to 1.9%. Adidas' operating margin, meanwhile, rose from 6% to 9.4% between the second quarters of 2015 and 2016.
Analysts are forecasting Under Armour's earnings to surge 32% in 2017, which seems quite solid but doesn't wholly validate its forward price-earnings of 50. Adidas' earnings are estimated to climb just a meager 9% compared to Under Armour’s next year, but the stock trades at a more sound 19 times forward earnings.
So which is The Better Buy?
Under Armour’s headline figures may look more solid, but the growth is clearly reversing. Margins are also shrinking and the valuations of the firm appear lofty. On the other hand, Adidas is on a gradual growth, reporting increasing sales growth and escalating margins, and valuations looking cheaper relative to its growth potentional.
Until Under Armour reports a more robust top and bottom line growth, Adidas will remain the current better buy of the two.
On a monthly timeframe of the Adidas stock, the current candle is marked at its highest ever at 152.450.
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