Nike, Inc. (NKE) and Skechers U.S.A., Inc. (SKX) are the world’s leading companies in the footwear manufacturing space. NKE’s portfolio of brands includes the NIKE Brand, Jordan Brand, Hurley, and Converse. SKX operates primarily through three segments — domestic wholesale sales, international wholesale sales, and retail sales, which includes e-commerce sales.
The coronavirus pandemic has led to the closure of many of the physical retail stores of footwear manufacturers. However, as sports events are gradually resuming, we think it is wise to invest in NKE and SKX, which both have a significant digital presence. Both companies have already proved they can generate significant digital sales and are benefiting from the rising demand from China.
While NKE has returned 126.4% over the past five years, SKX has gained 21.5%. In terms of past nine months’ performance, NKE is a clear winner with 79.1% returns versus SKX’s 63.5%. But which of these two stocks is a better pick now? Let us find out.
On December 30, NKE announced the launch of its Chinese New Year 2021 collection. The collection is organized into three design themes — the explosive firecracker, the artisanal Chinese knot. and the naturalistic spring blossom. The Nike Dunk is set to be launched on January 22 on SNKRS, the Jordan Brand footwear, including the Air Jordan V Low, is expected to be released on January 14, and the Air Jordan I Low OG is set to be released on January 31. The CNY colorways of the Converse Chuck 70 is expected to be offered beginning January 21.
The company launched the Nike React Infinity Run 2 on December 30. It features an updated Flyknit upper to help promote more strength and support in the toe area, eye-stay, and foxing, and with more breathability in areas like the vamp and the midfoot. UCLA Athletics announced a six-year agreement with the company on December 8 to make Nike and Jordan Brand the Bruins’ official athletic footwear, apparel and equipment provider beginning July 1, 2021.
SKX raised more than $1.8 million to support children with special needs and education through its Skechers Pier to Pier Friendship Walk that it held online in October. The company launched the new Skechers x Dr. Seuss collection on August 17, to bring Dr. Seuss’s vibrant world to life in wearable, comfortable designs for adults and children. In August, , SKX opened a flagship retail store on famed Rue De Rivoli in Paris. The company also announced in that it had been recognized as Women’s Footwear Brand of the Year at the Drapers Footwear Awards 2020.
Recent Financial Results
NKE’s revenue has surged 8.9% year-over-year to $11.2 billion for the third quarter ended November 30, 2020. The revenue growth was driven by growth across all geographies and led by 24% year-over-year growth in the China segment.
NKE’s gross profit has increased 6.7% year-over-year to $4.8 billion, yielding a gross margin of 43.1%. Its direct sales increased 32% year-over-year, and brand digital sales increased 84% year-over-year. Net income increased 12.2% year-over-year to $1.3 billion. And its EPS increased 11.4% year-over-year to $0.78.
SKX’s revenue for the third quarter ended September 30, 2020, increased 78.3% sequentially to $1.3 billion. Its China sales increased 23.9% year-over-year, and domestic wholesale business increased 6.3% year-over-year. Gross profit increased 69.6% sequentially to $625.1 million, yielding a gross margin of 48.1%. And its EPS of $0.53 surpassed the consensus estimate by 47.2%.
Thus, NKE is in a more advantageous position here.
Past and Expected Financial Performance
NKE’s revenue has grown at a CAGR of 3.3% over the past three years. Analysts expect the company’s revenue to increase 9.1% for the quarter ending February 28, 2021, and 15.6% in 2021. NKE’s EPS is expected to grow 41.5% for the quarter ending February 28, 2021, and 88.8% in 2021. Moreover, its EPS is expected to grow at a rate of 34.3% per annum over the next five years.
In comparison, , SKX’s revenue has grown at a CAGR of 5.2% over the past three years. The market expects SKX’s revenue to increase 10.4% for the quarter ending March 2021, and 19.4% in 2021. The company’s EPS is expected to grow 57.6% for the quarter ending March 2021, and 181.6% in 2021. Moreover, SKX’s EPS is expected to grow at a rate of 3% per annum over the next five years.
NKE’s trailing-12-month revenue of $38.25 billion is much more than SKX’s $4.62 billion. However, SKX is slightly more profitable with a gross margin of 47.5% versus NKE’s 42.9%.
NKE’s ROE and ROA of 28.3% and 7.5%, respectively, compare favorably with SKX’s 6% and 2.1%, respectively.
In terms of forward P/E, NKE is currently trading at 47.56x, 3% more expensive than SKX, which is currently trading at 46.18x. Moreover, NKE is more expensive both in terms of trailing-12-month P/S (5.77x versus 1.18x), and trailing-12-month EV/EBITDA (45.55x versus 20.85x).
In terms of trailing-12-month EV/S, NKE’s 5.82x is much higher than SKX’s 1.39x.
Though NKE looks much more expensive compared to SKX, it is worth paying this premium considering NKE’s significantly higher earnings growth potential.
While NKE is rated “Strong Buy” in our proprietary POWR Ratings system, SKX is rated “Neutral.” Here are how the four components of overall POWR Rating are graded for NKE and SKX:
NKE has an “A” for Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. It is currently ranked #1 of 36 stocks in the Athletics & Recreation industry.
SKX holds a “B” for Trade Grade, a “C” for Buy & Hold Grade, a “D” for Peer Grade, and an “A” for Industry Rank. It is currently ranked #13 in the same industry.
We believe both NKE and SKX are good investment bets considering their market dominance and continued expansion on the digital front. However, NKE appears to be a better buy despite trading at a much higher valuation based on its superior financials.
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NKE shares were trading at $142.75 per share on Wednesday afternoon, up $1.52 (+1.08%). Year-to-date, NKE has gained 0.90%, versus a 0.78% rise in the benchmark S&P 500 index during the same period.
About the Author: Manisha Chatterjee
Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...
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