Better Buy: Nike Inc vs. Skechers USA Inc

Do you remember L.A. Gear? The now-defunct shoe company might seem like ancient history -- a one-hit wonder that quickly went bust. But it could just as easily be viewed as an important lesson in building a burgeoning empire. That's because the founders of L.A. Gear -- Robert and Michael Greenberg -- didn't give up, and today's Skechers USA (NYSE: SKX) is evidence that there are second chances in this industry.

But how does the upstart, which has returned 1,270% to investors since the depths of the Great Recession, stack up against the industry's biggest player in Nike (NYSE: NKE)?

There's no fool-proof way to answer that question with 100% certainty. But there are three different lenses through which we can view the question that might help us reach a decision we're comfortable with.

Image source: Getty Images

Financial Fortitude

How a company uses and protects its cash might sound boring -- the kind of stuff that bean counters focus on. But in reality, it's vitally important.

That's because every company, at some time or another, will encounter tough times. Whether those tough times are macro or company-specific in nature, organizations that have cash will undoubtedly emerge stronger. They can buy back stock on the cheap, outspend rivals into oblivion, or even make acquisitions.

Those who are debt-heavy are in the opposite boat, forced to narrow their focus in an effort to make ends meet. Sometimes, they are wholly beholden to their creditors. That's never a good position to be in.

Here's how Nike and Skechers stack up in terms of financial fortitude, keeping in mind that Nike is valued at over 20 times the size of Skechers..




Net Income

Free Cash Flow


$5.9 billion

$3.5 billion

$3.9 billion

$2.7 billion


$665 million

$67 million

$266 million

$176 million

Data source: Yahoo! Finance

While the difference in size might distort the numbers, both of these companies have equally healthy balance sheets. Neither has a burdensome debt load. In fact, payments on long-term debt are relatively small. And each has more than enough cash coming in from free cash flow to give the companies the flexibility they would need if times suddenly became a lot tougher -- financially speaking.

Winner = Tie

Sustainable competitive advantages

If I could go back in time and tell my younger self one thing about investing, it would be this: "Spend most of your time investigating a company's sustainable competitive advantages!"

Often called a "moat" in investing circles, a company's sustainable competitive advantages are what separate it from the pack. They're what keeps customers coming back for more -- year after year, and decade after decade.

Image source: Nike

In just about any clothing company, the true moat is measured by the strength of a company's brand. While having enough scale to hold down input costs is important, it is a company's brand that truly wins over fans, and allows for small mark-ups to continue ad infinitum.

Skechers' performance has certainly been impressive since it came on the shoe scene in the early 1990s. The company started with skaters, then moved toward athletic shoes, and has branched out into casual as well.

But there's simply no one that can really hold a candle to Nike. The company owns some of the most iconic shoe brands the earth has ever seen (Air Jordans, anyone?), has irons in several fires outside of shoes -- like clothing and athletic gear -- and has a logo that's recognizable by citizens around the world.

That type of strength gives Nike the edge here.

Winner = Nike


Finally, we have valuation. While this isn't an exact science, there are some straightforward metrics we can consult to give us an idea of how expensive each stock is.




PEG Ratio


FCF Payout













Data source: Yahoo! Finance, E*Trade. P/E represents figures from non-GAAP earnings.

Clearly, Skechers is the cheaper brand. Not only does it trade at a significant discount in terms of its earnings and free cash flow ratios, but even when growth potential is taken into consideration (PEG Ratio), it appears to be 10% cheaper than Nike.

While Nike's dividend is nice -- and it certainly has room to grow -- it's not big enough to tip the scales in the company's direction.

Winner = Skechers

And the winner is...

So there you have it: we've got a draw. Nike is the better choice if you're after a more established player with the potential to pay bigger dividends moving forward. Skechers is more for investors who feel that they understand how and why the company might be able to continue stealing market share away from more established players.

If I were forced to choose, I would definitely go with Nike, as I always use the stronger moat as the tiebreaker. That being said, I have no skin in the game, as I think there are even better places for your money than these two companies.

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Brian Stoffel has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Nike and Skechers. The Motley Fool has a disclosure policy.