Battle of the Athletic Gear Makers: Nike vs. Under Armour vs. Lululemon



Will Ashworth, InvestorPlace Contributor

OK -- without looking at a chart, guess which company's stock is nearest its all-time high:

1. Under Armour (UA)
2. Nike (NKE)
3. Lululemon (LULU)

If your guess was Nike, you'd be right. The global footwear and apparel giant is within a dollar of its all-time high of $101.97. But Lululemon and Under Armour are within 6.8% and 16.5% of their all-time highs, respectively, as well.

It's a sporting trio if I ever saw one. The question now is whether one or more of them can keep the surge going. Rather than pick an outright winner, let's look at the pros and cons of each, and you can make up your mind from there.

Under Armour

Business is good for the Maryland company. In late October, it raised its 2011 outlook for net revenues and operating income. On January 26, we'll likely see that it increased revenues in the past year by at least 37%, to $1.46 billion, and operating income by at least 42%, to $159 million. These are definitely solid numbers.

A couple of things stand out in its 2011 performance: Apparel sales will likely hit the $1 billion mark for the first time in the company's history, and its accessories business is booming, with $95.6 million in revenue for the first nine months of 2011, an increase of 228.2%. It should be noted that this big jump is due to bringing the accessories business in-house as of January 1, 2011. Doing this boosted the accessories unit's gross margin, which is now higher than footwear's, making accessories an equally important part of the company's overall business strategy.

The cons? There are three concerns: First is that markdowns of Under Armour's products seem to be cropping up at Dick's Sporting Goods (DKS) and Sports Authority as well as online and at the company's own stores. Inventory levels are rising as UA explores new sales channels. Markdowns mean lower margins. With a high earnings multiple on the stock, anything less than flat margins in the fourth-quarter results could mean a big hit to the share price.

Second: The company lacks a presence beyond North America. For the first nine months of 2011, UA's international revenues were just $63.4 million, or 5.9% of sales. If it ever wants to challenge Nike, it will have to pick up the pace globally.

Third: Since the end of fiscal 2008, UA hasn't released a separate figure for women's apparel sales versus men's. This decision could have been made for many reasons, but you have to wonder why the company would do that if the women's business were flourishing. If UA wants to be an international success, it will have to pull up its socks in the women's market.


While speaking at the product launch of Nike's FuelBand, which measures your wrist movement and overall activity, CEO Mark Parker indicated that Nike isn't seeing a slowdown in any of its biggest markets. Fighting higher input costs with price increases, Parker expects incremental gross margin increases for the next several quarters into fiscal 2013. Nike has maintained consistently high margins over the years - both gross margins and operating margins. Since 2003, its gross margins have always been higher than 40%, and only once did operating margins drop below 10%.

Consistent margins translate into consistent profits. Investors can rest easy knowing that the Portland powerhouse will produce the goods. Since Nike does business globally, it's always interesting to see where it's going next. China continues to be a big priority for the company, with sales rising 35% in the second quarter, ended November 30, and now represent 11% of Nike's overall sales. Considering that most of the world's population growth, not to mention growth of the middle class, is happening in Asia, Nike's numbers there will continue to grow for years to come.

My first concern with Nike is opposite of that for Under Armour in that Nike's footwear business, which has lower margins than apparel, represents 64% of overall revenues. That's not quite the imbalance found at Under Armour, but if Nike could move that closer to 50/50, its bottom line would look that much sweeter.

Second, there's the Phil factor. What happens after Phil Knight retires? Even though Mark Parker is in charge now, Knight is still chairman and founder. Does the culture remain once he's no longer around? It's impossible to answer this, but it's a concern nonetheless. Frankly, it's tough to pinpoint any real weakness in Nike's business.


This is the new kid on the block. Lululemon went public in July 2007 at a split-adjusted price of $9 a share. Since its IPO, the stock is up 568%, versus 92% for Nike and 44% for Under Armour. The company is most associated with yoga wear is doing a good job of expanding beyond its original market. Running apparel now accounts for one-fifth Lululemon's overall sales, and cycling apparel looks to be the company's next target.

While Lululemon designs great products, its retail stores are what drives its business. In the third quarter, ended October 31, 2011, same-store sales increased by 16% on a constant dollar basis. More impressive is that sales per square foot were $1,880 -- higher than any other retailer in North America, with the possible exception of Tiffany & Co. (TIF).

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Although Canada is likely nearly saturated, with 45 stores, the U.S. has just 106. Since America's population is 10 times Canada's, there's no telling where the expansion ends. That's a good problem to have, especially with the kind of sales numbers each store generates. Finally, Lululemon now has five Ivviva stores in Canada, which cater to kids aged 6 to 12. Some suggest the U.S. could support as many as 50 of these stores. I suspect that number is conservative.

It's hard to argue with a brand that's been this successful. However, the biggest concern with Lululemon is growing too quickly and losing control of its business. You don't generate $1,880 in sales per square foot without enthusiastic brand evangelists. Getting sloppy and simply slapping up stores without paying attention to customer service and product quality will do nothing but turn off the faithful.

That's something Lululemon has already faced in recent quarters as it deals with inventory issues. At different times in the past year, the company has had both inventory shortages and excesses as it tries to find the perfect balance. It likely never will.

The other issue, which all three of these companies face, is an imbalance in sales between the sexes. In Lululemon's case, it's a matter of not attracting enough male customers. But if that's the worst problem the company has, it's very lucky indeed.

The bottom line: All three of these companies have bright futures. Interestingly, each has high insider ownership. Is this a coincidence? I doubt it.

As of this writing, the author did not own a position in any of the stocks named here.

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