Until very recently, Under Armour (NYSE: UAA) (NYSE: UA) represented one of the most successful, fastest-growing clothing companies in the world. For over 20 consecutive quarters, the company's sales jumped more than 20%. What started out as a short-term solution to founder/CEO Kevin Plank's frustration with the non-wicking shirts he was forced to use as a member of the University of Maryland football team turned into a worldwide phenomenon.
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Skechers (NYSE: SKX), on the other hand, is the second coming of a shoe family. The father/son duo of the Greenberg family started out by founding and running L.A. Gear. Though that brand is now defunct, the Greenbergs took what they learned from their experience to found Skechers.
Image source: Getty Images
With Under Armour down 75% in the past year, does that make it a better buy than Skechers? Not necessarily. To dig deeper into the question, let's evaluate where these companies stand on three crucial variables.
Sustainable competitive advantages
If Dr. Emmett Brown of Back to the Future fame showed up at my front door and offered to drive me back to 2008, when I started my investing career, I'd tell my former self to focus on one thing: sustainable competitive advantages. While the other two facets we'll explore are important, nothing trumps this variable, which is often referred to as a moat.
In the simplest sense, a moat is what makes a company special, what differentiates it from the competition, and what keeps customers coming back year after year. Both Skechers and Under Armour rely heavily on the strength of their brand to provide a moat.
Under Armour was the first mover among major athletic companies to providing wicking clothing. The "technology" was an enormous hit with athletes, and Under Armour's popularity spread like wildfire. Since then, the company has branched into countless sports, sponsoring teams and focusing on other areas such as shoes and -- more recently -- connected fitness. Skechers, on the other hand, has won a loyal following with its combination of casual and athletic shoes.
In the end, though, it isn't too hard to see that Under Armour has the stronger brand. Statista estimates that the Under Armour emblem alone is worth $5.5 billion. Skechers, on the other hand, has an estimated brand value of less than half the size: $2.6 billion, according to Brand Finance.
Winner: Under Armour.
Normally, investors in companies that are growing like Skechers and Under Armour like seeing cash aggressively reinvested into new opportunities. But there's a flip side to that strategy: It makes the company fragile over the short term.
At one point or another, every company will experience difficult financial times. No one is immune. No one knows when the bad times will hit. But companies that head into downturns with lots of cash on hand have options: They can outspend their rivals to gain market share, buy back shares on the cheap, or even make acquisitions. Debt-heavy companies are in the opposite boat: They're forced to narrow their focus just to make ends meet.
With all that in mind, here's how these two companies stack up in terms of financial fortitude.
Data source: Yahoo! Finance.
Here we have a very clear winner: Skechers. Under Armour has been investing heavily in broadening its appeal internationally, as well as trying to win the war to provide the very best of connected fitness. The plan hit turbulence when North American sales -- normally the company's bread-and-butter segment -- faltered, leading to negative free cash flow and a cash pile that pales in comparison with debt.
Skechers is in the exact opposite boat: A very healthy balance sheet is buoyed by healthy income and free cash flow.
Finally, we have valuation. While this one isn't an exact science, there are some straightforward metrics we can consult to give us an idea of how expensive each stock is.
Data sources: Yahoo! Finance, E*Trade. P/E represents figures from non-GAAP earnings.
Here again we have a clear winner. That Under Armour is free cash flow-negative is reason enough to give the nod to Skechers. But the company also trades at a 50% discount in terms of earnings, and a 42% discount relative to expected growth (the PEG ratio).
The winner is...
So there you have it: Skechers appears to be the better buy at today's prices, while Under Armour's stock has fallen on hard times. It's worth noting that in apparel, moats are always narrow, so the fact that Skechers was behind in this regard isn't overwhelmingly negative.
The company's advantage in terms of valuation and financial fortitude, however, are rather large. I don't own either one of these companies, but if forced to choose, my easy vote would be Skechers.
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Brian Stoffel has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Skechers, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has a disclosure policy.