Under Armour Or Skechers?

October 6th, 2020 by Trefis Team
UAA: Under Armour logo
UAA
Under Armour

Under Armour’s stock (NYSE: UAA) has lost nearly 43% since early February after the WHO declared the Coronavirus a global health emergency, while Skechers’ stock (NYSE: SKX)  has lost around 18% of its market value over the same time period. The lockdown in various parts of the world has hurt the apparel industry worldwide, with full recovery not expected over the next couple of months. Moreover, fading consumer demand, reduced discretionary spending, rising unemployment levels, and stay-at-home orders resulting in stores remaining closed continue to take their toll on the apparel industry. However, we believe Skechers has the edge over Under Armour and is likely to fare better over the coming months because of its stronger brand presence (geographical diversification), steady growing business, and a diversified business model as compared to Under Armour.

Our conclusion is based on our detailed dashboard analysis, Under Armour, Inc. Class A Looks Expensive vs. Skechers U.S.A. ’ wherein we compare trends in key metrics for the two apparel companies over the years to determine their relative valuations under the current circumstances.

  • Skechers derives roughly 40% of its revenues from North America, while Under Armour makes nearly 70% of its sales from the region.
  • Skechers has a stronger balance sheet, with the company having a comfortable $1.5 billion in cash reserves as per the latest report, while Under Armour’s cash reserves stood at around $1.1 billion.  However, Under Armour is currently more levered (debt) with the company’s debt balance of around $1.2 billion while Skechers had around $750 Mil in total borrowings. (as per recent 10 Q filings).
  • Additionally, Skechers has achieved steady growth over the last few years, with Skechers’ revenues growing by 25% between 2017 and 2019. On the other hand, Under Armour’s revenues have grown by less than 6% over the same time period.
  • Finally, Skechers has a larger retail footprint with the company operating more than 1,150 stores as of 2019 while Under Armour’s store count stood at less than 500. A larger retail footprint will help Skechers achieve faster growth once things return to normal as the outbreak of the virus subsides.

Why Has Skechers Stock Fared Better Over Recent Months?

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Skechers’ P/E based on 2019 earnings has declined from 19x in 2019 to 14x currently, while Under Armour’s multiple has contracted from 108x (P/E multiple was unusually high as the company barely made a profit) to about 57x. Both companies have witnessed a steep contraction of the multiple, however, we believe Skechers’ multiple is appropriate at its current level. On the flip-side, Under Armour’s multiple appears high, keeping in mind the fact that the company’s revenues and margins are at a higher risk compared to Skechers’. Notably, Skechers’ P/E is toward the lower end of the spectrum seen over the last six years, while Under Armour’s multiple seems to be elevated. This leads us to believe that UAA stock could be vulnerable. Overall, it’s likely that Skechers stock will outperform UAA, if not near-term, at least in the medium- to long-run.

But How Long Will Skechers Continue To Outperform?

  • The expected timeline for recovery in global economic conditions, and in Under Armour’s stock, hinges on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia.
  • Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture and complements our analyses of the coronavirus outbreak’s impact on a diverse set of Under Armour’s multinational peers, including Nike and Crocs. The complete set of coronavirus impact and timing analyses is available here.
  • We believe there will be a recovery in demand for most sectors by October-November, with the gradual lifting of lockdowns and a gradual rise in the number of Covid-19 cases remaining within the manageable capacity of hospitals and care providers.

 

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