What is the best sportswear stock?

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The sportswear industry can be incredibly lucrative. Some of the biggest and most profitable brands are in the space, including NIKE, Inc. (NYSE: NKE) and Adidas S.A. (FROM: ANNOUNCEMENTS). In this article, we take a look at two small companies in the industry, Lululemon Athletica (NASDAQ: LULU) and Under Armor (New York Stock Exchange: UAA) (NYSE: AU), whose niche brands have gained traction over the past decade against their more established competitors. However, only one of the two seems financially sound these days. I’ll explain why Lululemon is probably the best game here.

Accordingly, I am bullish on LULU stock and neutral on UA ​​stock.

Which brand has better prospects?

Lululemon and Under Armor have built very strong brands in their respective categories.

Lululemon has established its dominance in quality yoga outfits known as Luon. They easily dry perspiration so that the user can stay comfortable even in hot weather. In fact, Lululemon’s leggings have become the go-to option for consumers in this premium product category, allowing the company to achieve incredible pricing power.

More recently, the company has leveraged its strong pricing power to expand its presence into other apparel categories, targeting the same high-end consumer target group.

On the other hand, Under Armor is mainly known for its high performance sports equipment, which focuses on reliability and performance optimization.

The company has done a great job building a strong brand by partnering with iconic athletes. Among them is Dwayne “The Rock” Johnson, whose unparalleled influence has been a mainstay of Under Armour’s overall credibility.

All in all, building a strong brand in the industry is paramount. Ultimately, anyone can design and produce running shorts, t-shirts, and leggings. There’s hardly anything proprietary here.

A strong brand image, along with adherence to the relevant quality standards that a business advertises for, is the secret sauce to success. Yet building strong brands at scale is incredibly difficult and, most importantly, very expensive.

Either way, I think both companies have built equally strong brands in their respective categories and are equally valued by their distinct target groups. With that in mind, let’s check which of the two is doing better financially.

Lululemon’s finances are remarkably better

What makes Lululemon a better choice over Under Armor relatively easily is its huge finances. As for the company’s public data, going back to 2005, revenue has grown every year without exception.

This is an extended trend of serial revenue growth, which could mean the company is entering a mature phase. Still, the company’s five-year compound annual growth rate of revenue growth currently stands at 21.7%, showing robust momentum and little to no signs of an alarming slowdown.

Simultaneously, the company managed to remain extremely profitable, suggesting vigorous organic growth and thoughtful advertising spending. To provide context here, Lululemon’s EBITDA margins have hovered between 25% and 30% over the past decade. In the meantime, Nike and Adidas’ EBITDA margins have averaged close to 15% and 10%, although Lululemon clearly has lower scale and production capabilities than these technology giants. ‘industry.

When it comes to Under Armour, things look less exciting. The company achieved record revenue last year, but revenue growth has clearly slowed dramatically. The company has a five-year revenue growth CAGR of just 3.3%.

Moreover, its bottom line failed to thrive. While EBITDA margins have struggled to stay above 10% in recent years and interest charges on debt have added additional weight to what might otherwise be somewhat acceptable profitability, net income margins were barely positive. In fact, the company reported losses in 2017, 2018, and 2022.

I believe this is due to the company overextending its ad spend against decelerating revenue growth to stay relevant, which has squeezed margin wiggle room. Last year, advertising spending alone grew by 18.2%. The fact that, unlike LULU, UA has failed to expand into other categories is also worrisome for its future avenues of growth.

What is the target price for the LULU share?

As far as Wall Street is concerned, Lululemon has a strong buy consensus rating based on 18 buys, two holds and one sell assigned over the past three months. Lululemon’s average price target of $397.82 suggests upside potential of 23.8%.

What is the target price for UAA shares?

Wall Street sentiment for Under Armor is relatively more mixed, with the stock attracting a moderate buy consensus rating based on five buys, 10 holds and one sell attributed over the past three months. Nonetheless, the average Under Armor price target of $10.31 suggests 43% upside potential.

Conclusion: Go for the High Quality Option

Wall Street estimates point to a much bigger upside for UAA stocks. This is likely because the stock looks significantly cheaper on paper. Specifically, UAA shares are trading at a forward P/E of 11.4x (for the next 12 months), implying a steep discount to LULU’s forward P/E of around 28x.

That said, I’d much rather pay a premium multiple for a business growing over 20% while maintaining industry leading margins than buying what seems like a discount today, which ultimately won’t have it doesn’t even matter if UA remains unable to prove significant. medium-term margins.

Either way, with UA losing growth momentum and increasing advertising costs, I would most certainly be skeptical of the viability of its investment.

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