Why Nike Will Outrun Under Armour
Nike and Under Armour are good performers, but in terms of stock price and infrastructure, Nike wins the race.

Nike (NYSE:NKE) and Under Armour (NYSE:UA) are both flirting with 52-week and five-year highs. It’s an intense competition for sure. Nike’s stock is up 11% as of Oct. 25, Under Armour an impressive 46%. Both are firing on all cylinders. However, if I had to pick, I’d sell UA stock and buy NKE. Here’s why.

Cracks in the Armour

These aren’t cracks you would necessarily anticipate. Under Armour just came off a strong third quarter during which revenues increased 42% to $465.5 million, and net income 31.8% to $49 million, or 88 cents per share. As a result, it raised its full-year revenue guidance to a minimum of $1.46 billion and operating profits to $159 million. That’s year-over-year growth of 37% and 42%, respectively.

What’s not to like? Its nascent footwear business grew 96.7% in Q3, to $52 million. Apparel revenue grew 31.3%, accessories 210.2% and direct-to-consumer 73%. Its factory outlets and e-commerce now account for 22% of overall revenue, and that figure is rising. By the end of 2011, Under Armour will have 80 factory house stores open; another 16 to 20 will open by the end of 2012. About the only thing that isn’t growing is the company’s licensing revenue, which declined 17.8% in the quarter, to $10.4 million. It’s a very small part of the company’s overall business and not a concern.

Under Armour’s business is fundamentally sound, no question. However, this is an argument about which stock to own. Nike is the 1,000-pound gorilla to Under Armour’s church mouse. Growing globally and expanding its direct-to-consumer business at the current pace raises questions about whether Under Armour will be able to keep a lid on costs. In the third quarter, UA’s gross margin shrunk 250 basis points, to 48.4%, and its operating margin declined 120 basis points, to 16.1%. Revenue outside the U.S. accounts for just 7% of overall sales.

Moving the needle on this front is going to take increased marketing and sales expenditures. In the third quarter, Under Armour’s marketing expenses increased 36% year-over-year, to $48.4 million. With 93% of its revenue in the U.S., it’s able to leverage those costs. It won’t be able to do that as easily overseas. Expect marketing costs to increase substantially.

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