The Rise and Fall of the Sneaker Giants

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In this segment from Market Foolery, host Chris Hill and Motley Fool Hidden Gems' Abi Malin discuss the changing landscape in the sneaker and athletic apparel business. Adidas, which just a few years ago was in the doldrums, has surged to the No. 2 sneaker maker spot thanks to new leadership and a better strategy, while Nike (NYSE: NKE) and Under Armour (NYSE: UA) (NYSE: UAA) were both recently downgraded by analysts. But Nike's troubles are focused on one segment of its business, while Under Armour's woes look more broad-based.

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A full transcript follows the video.

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This video was recorded on Sept. 19, 2017.

Chris Hill: From Mark Hubbard, listener No. 32 in the U.K., "Whenever you talk about Under Armour and Nike, you never seem to mention Adidas. With its new CEO and finger back on the fashion pulse, if Adidas is not the 800-pound gorilla in the room, it is definitely the 500-pound gorilla." First of all, I love that example. I love that Mark is saying, "Let's not classify all gorillas as 800 pounds. A 500-pound gorilla."

Abi Malin: Still relevant.

Hill: Still relevant, still kind of terrifying, and timely, with today's story in the Washington Post about how Adidas is now No. 2 in the United States in sneaker sales, trailing only Nike.

Malin: Replacing the Jordan brand.

Hill: Yeah. And with the rise of Adidas, which, five years ago, Adidas seemed like it was in so much trouble. It just shows you how, to Mark's point, new leadership and a new strategy can turn things around. On the flip side, we've got both Nike and Under Armour this week getting downgrades from different analysts for different reasons. As we shift from toy retail to athletic apparel, what stands out to you among these three things? In terms of the rise of Adidas, the downgrade of Nike, which appears to be focused very much on their basketball line of products, and Under Armour's, which in some ways is a more dire downgrade?

Malin: Going into that basketball point a little bit, basketball footwear sales declined 20% this year, and this is the category's second year of decline. Nike declined in the mid-single digits with the Jordan brand, lost a third of their sales. Under Armour was down about half, but Adidas basketball has grown by more than 40%. I think part of this is product innovation, part of this is staying relevant. And I think a lot of this speaks to the fickleness of retail and consumers in general, and how quickly things can change. And I think if you look at the reactions on Twitter to this, a lot of people were saying, "We had no idea, we never would have seen this coming five years ago." And I think that's part of the challenge of investing in retail, honestly. Things can change really quickly.

Hill: And when you overlay with Nike the fact that, a year ago, they came out and said, "We're getting out of the golf business, we're shutting down our golf division completely because it's just not worth it to us," so therefore they're able to invest more in the real money makers, basketball.

Malin: They took away that diversification. Probably regretting it now.

Hill: Yeah. And again, if you just look at the two stocks over the past year or so, Nike is basically flat, Under Armour is down about 60%. Because of Nike's size, because of their longer track record of success, I think it's natural and probably correct to look at them and say, "OK, well, they're not in the same amount of trouble as Under Armour." By the same token, I am a little surprised by this second year in a row of a pretty substantial decline for basketball. They've done so well for so long. And they've got the stars. Can we talk about Under Armour for a second? That downgrade was ... was that Wells Fargo downgrading them?

Malin: Yeah, Wells Fargo, from a price target of $17 down to $13, which is pretty dramatic.

Hill: [laughs] As an Under Armour shareholder ...

Malin: Yeah, that one hurts.

Hill: It doesn't hurt any more than the previous 12 months have hurt. But, when I look at that one, that downgrade was not about one particular part of Under Armour's business. That was about this overall trend, and saying, "Look, we think we're going to see an overall decline in athletic footwear, athletic apparel." If that plays out for Under Armour, doesn't it stand to reason it plays out not just for Nike but for Lululemon Athletica (NASDAQ: LULU)?

Malin: I think there's a little bit of a difference in the brands. Lulu focuses more on women's wear than either of those two brands do. I think it's a little bit more fashion than athletic. People wear that out, around, to brunch, whatever you're doing. Whereas with Under Armour and Nike, they've been more primarily focused in that athletic space. But, it's definitely something to watch and consider, for sure.

Hill: So, when Under Armour and Nike saw what Lululemon was doing a couple of years ago, and the success that Lululemon had with, in particular, yoga pants, and they looked at that and said, "You know what we can make? We can make yoga pants, too." And it was thought at the time by a number of people, including a bunch of people here at The Motley Fool, that this might be trouble for Lululemon because Nike and Under Armour have good brands, and if they can sell quality yoga pants for a third less the price, who's going to go pay $100 at Lululemon? Where do you see this landscape now?

Malin: I think it's a little bit different when you talk about those three companies in particular, in terms of their distribution cycles. Lulu focuses on their own stores primarily. They built a brand around that brick-and-mortar space, where I think Nike and Under Armour have a long history and a strong reliance on those third-party distributors, which we've seen struggle in the past year with a lot of those store closures.

Hill: I was going to say, like Sports Authority going out of business?

Malin: Right, exactly. So, I think they're a little bit more exposed on that end, which is something to consider, for sure.

Hill: We'll close up on these. Nike, Under Armour, do you look at either of those stocks today and say, particularly in the case of Under Armour, this is a screaming buy right now? Or, as someone who studies this space, do you look at Under Armour and think, you know what, I want to see them put up a couple of good quarters before I look to buy shares of this company?

Malin: It's really dependent on your portfolio and what your exposure is and things like that. I definitely wouldn't sell Under Armour at this price. I think at this point, you might as well ride it out, because, yikes. [laughs]

Hill: That's my problem, [laughs] yeah, exactly. There are absolutely those moments where it's like, "Well, it's already fallen to this point, so what's a few dollars more?"

Malin: Right.

Abi Malin has no position in any of the stocks mentioned. Chris Hill owns shares of Under Armour (C Shares). The Motley Fool owns shares of and recommends Lululemon Athletica, Nike, Twitter, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has a disclosure policy.