Innovation Is the Key Growth Driver for These Premium Sport Businesses

Innovation Is the Key Growth Driver for These Premium Sport Businesses

Nike has been a great stock for shareholders to hold for the long run. It is also a consistent dividend-paying company. In the past five years, Nike has given investors a total return of 225.60% which beat the S&P 500's total return of 105% during the same period. Shareholders must feel quite happy with Nike recently after its strong second-quarter results beat analysts' expectations. However, Nike shares declined slightly on the market. Is Nike now a better choice for investors than its peers Adidas and Under Armour ?

Innovation drives Nike's operating performance
In the second quarter, Nike grew its revenue from continuing operations by 8% to $6.4 billion, driven by good growth in every geography and key category. Its net income reached $537 million which was a 3% increase over the same period last year. Earnings per share experienced higher growth of 4%, due to Nike's share buyback activities.

Despite the challenging retail environment, Nike has still delivered a decent operating performance due to its focus on product and performance innovation. In the recent quarter, Nike's innovation came from three main areas: digital initiatives, new advances in apparel, and manufacturing revolution. E-commerce revenue increased by 33%, and Nike believes the digital area will be one of its main long-term growth drivers.

In the second quarter, the next generation of the Nike+ Fuelband, the Fuelband SE, launched. This reinforced Nike Fuelband's goal of becoming the world's leading way to measure all kinds of activities. The company also mentioned that it will keep investing in infrastructure and innovation to drive its digital strategy forward.

For apparel, the company stands out with its ColorDry and Flyknit innovations. ColorDry is considered quite environmentally friendly as it reduces dyeing time by 40% and energy use by 60%, and it also lowers factory footprint by a quarter. ColorDry does not only save more energy and time, it also delivers more saturated and consistent colors in the fabric. Flyknit, on the other hand, reduces the weight of shoes while creating the feeling of a second skin for runners.

Adidas and Under Armour are also very innovative companies
Nike's global peer, Adidas, enjoyed revenue growth of 14% due to its ground-breaking product innovations, including Energy Boost and Springblades. Energy Boost, which was developed in partnership with BASF, has thousands of units of compressed, thermoplastic polyurethane, or TPU, material.

This new technology is three times more temperature resistant than the current standard EVA foam, which not only gives runners the most comfortable feel but also delivers a responsive energy return which enhances running performance. A high-tech polymer and 16 elastic blades are used in Springblade, giving runners more energy return than traditional EVA cushioning while providing great cushioning.

Under Armour is also a consistent product innovator, positioning itself as a premium brand in consumers' minds. Recently, the company has introduced several product innovations including ColdGear Infrared and SpeedForm. ColdGear, with a ceramic thermo-conductive inner coating, can keep its users warm and retain their body heat. SpeedForm, which was innovated based on the idea of fit, was not made in normal footwear factories but rather bra factories, where fit was one of the most important factors.

My Foolish take
Because of product innovations, all three of the above-mentioned companies can place premium pricing on their products. Innovation leads to premium pricing, which leads to good growth and high valuations. Thus, we can not expect these three businesses to trade at low valuations.

Among the three, Under Armour is the most expensive as it is valued at 62 times its trailing earnings. Adidas ranks second with an earnings multiple of 36. Nike is the cheapest one with a P/E ratio of 26.6. Thus, among these three, I like Nike the most because of its global-leading position in the sports industry, lower relative valuation, and decent dividend yield at 1.10%.

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Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Nike and Under Armour. The Motley Fool owns shares of Nike and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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