Better Buy: Nike Inc. vs. Skechers USA

Nike (NYSE: NKE) and Skechers (NYSE: SKX) are very different companies. Nike sells a wide range of footwear, apparel, and accessories through its namesake, Jordan, Converse, and Hurley brands. Skechers generates most of its revenue from its namesake footwear, with a smaller percentage coming from apparel and accessories.

Nike relies heavily on multi-million dollar endorsement deals with top-tier athletes, while Skechers secures lower-key endorsements with celebrities like Meghan Trainor, David "Big Papi" Ortiz, and Sugar Ray Leonard. Whereas Nike is focused on performance, Skechers promotes comfort with its gel-infused memory foam shoes.

Those two strategies yielded very different results. Nike shares slipped 9% over the past 12 months, but Skechers rallied about 10%. Does that divergence indicate that Skechers is becoming a better footwear stock than Nike? Let's examine their growth rates, valuations, and headwinds to find out.

How fast are Nike and Skechers growing?

Nike's revenue rose 6% to $34.4 billion last year, or 8% on a constant currency basis. By that measure, Nike brand (including Jordan) revenues rose 8% to $32.2 billion, while Converse revenues rose 6% to $2 billion.

The company noted that Nike's growth was driven by higher direct-to-consumer sales and brick-and-mortar store openings. Converse's growth was fueled by higher demand in the U.S. and Europe, thanks to its ongoing transition toward the Italian market.

Just 44% of Nike's total revenues came from North America during the year, which was its weakest market with 3% growth. Its strongest market was China, which posted 17% growth and accounted for 12% of its top line. Wall Street expects Nike's revenue to rise 5% to $36 billion this year (fiscal 2018) -- but that's a long way from the $50 billion it planned to hit by fiscal 2020.

Skechers' revenue rose 13% to $3.56 billion last year as its wholesale business grew and its brick-and-mortar comps improved. 58% of Skechers' revenue came from the U.S. and Canada, while all other markets were categorized together under its "other international" segment.

Skechers' other international revenue rose 30% to $1.51 billion last year, easily outpacing the U.S. segment's 2% growth and the smaller Canadian unit's 26% growth. That's why Skechers is aggressively expanding overseas, primarily through joint ventures with local distributors. Analysts expect Skechers' revenue to grow 14% to $4.1 billion this year.

Profits, valuations, and other factors

In addition to offering stronger revenue growth, Skechers' gross margins eclipsed Nike's over the past year.

A key difference is that Nike has more direct competitors, like Under Armour and Adidas, while Skechers occupies a more defensible niche. The overall footwear market has also been rough, with several sports retailer bankruptcies flooding the market with excess inventory.

Analysts expect Skechers' earnings to stay flat this year, but grow 25% next year. Nike's earnings are expected to slip 4% this year before rebounding 16% next year.

Nike currently trades at 22 times earnings, which is higher than Skechers' P/E of 19 and the industry average P/E of 21 for footwear and accessories makers. However, Nike pays a forward dividend yield of 1.3%, which is supported by a low payout ratio of 28%. Skechers has never paid a dividend.

Lastly, we should check insider sentiment to gauge how employees feel about their companies. Over the past 12 months, Nike's insiders sold a whopping 4.8 million shares but only bought about 598,000 shares. During that period, Skechers' insiders bought 500,000 shares and sold 314,000 shares.

The winner: Skechers

Nike's softer top and bottom line growth, slumping gross margins, higher valuations, and weaker insider sentiment all make it a worse investment than Skechers at current prices. Nike also faces tougher competition than Skechers, and it could require a lot of marketing firepower to keep rivals like UA and Adidas at bay.

Skechers occupies a comfortable niche in the competitive footwear market, and its aggressive overseas expansion should help it keep posting double-digit sales growth for the foreseeable future.

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Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nike, Skechers, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has a disclosure policy.