In every industry, there will be one undisputed leader from whom other companies learn many new things. The sportswear industry is no exception to this rule. When we think about this industry, the first name that comes to mind is Nike (NKE, Financial), the name behind sports equipment, apparel, accessories, etc. Many companies have tried to emulate the success story of Nike but in vain. For the last few years, there is another name that is being spoken about quite often in this industry. The company that we are talking about is Under Armour (UA, Financial) – a name that is touted to be Nike’s serious competitor currently. Many believe that Under Armour has the capacity to eat away Nike’s market shares in a few years. Is this true? Not quite, as experts say. Read on to know more:
Size matters
The first and foremost factor that gives Nike a monopoly in the sports industry is its size. With a market capitalization of close to $86 billion, Nike is almost five times bigger than Under Armour’s market capitalization of around $17 billion. Nike currently trades at close to $99.73 per share, whereas Under Armour is priced at a lesser range of around $80 per share now. With the sheer volume of trading that it does, Nike is definitely a far reach for Under Armour, at least for now. It is good for the company to get inspired by the success of Nike, but to dream about beating the giant, is indeed a tough ask for Under Armour.
The next point that works in favor of Nike is its dividend yield. Investors are quite happy with the 1.1% dividend yield of Nike. Under Armour fades quite miserably in comparison as it doesn’t pay out any dividends right now. It has to work a lot in terms of returning reasonable returns to its investors, so that it gains their confidence. The following is the share price movements of Nike and Under Armour for the last one year:
Geographical diversification
When it comes to geographical diversification and growth in international markets, Nike wins hands down. Currently, Under Armour is centred around the U.S. only and just about 10% of its revenues come from territories outside North America. On the other hand, Nike has a strong presence in foreign countries. During the first quarter of 2015, Nike reported a 6%, 17% and 21% increase in sales in the U.S., China and Western Europe respectively when compared to the numbers of Q1 2014. With the standard of living improving in many other economies in the emerging markets like India, China, Brazil, etc., Nike is all set to penetrate further into these markets and cement its monopoly there as well. Currently China is the most promising of all markets, but it contributes to just around 10% of Nike’s total revenues; this proves that there is massive scope of growth in this area for the company. Once the entire potential of this market is untapped, Nike would easily get to a position which would become unreachable for any other company in this sector.
Conclusion
Nike has been investing handsomely in research and development to make its products comfortable and lightweight. With these new techniques and a decent return on invested capital, Nike is indeed a world leader in the sportswear and accessories industry. It is quite impossible for Under Armour to scale to Nike’s heights in the coming years. Nike has lots of products to fall back on, and it has an excellent geographical coverage which its competitors don’t enjoy. It is precisely due to this factor that Nike is expected to soar to great heights in the future as economies of emerging markets are in the booming stage, giving Nike a huge window to grow, in the near future.
