Nike Stock Offers Better Return Prospects Than Skechers

by Trefis Team
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Nike’s stock  (NYSE: NKE) has gained 13% since early February after the WHO declared the Coronavirus a global health emergency, while Skechers’ stock  (NYSE: SKX) has lost around 22% of its value over the same time period. The lockdown in various parts of the world has hurt the apparel industry worldwide. Moreover, fading consumer demand, reduced discretionary spending, and stay-at-home orders resulting in stores remaining closed continue to adversely impact the apparel market. However, Nike is uniquely placed in the apparel industry and we believe Nike stock has the edge over Skechers and is likely to fare better over the coming months because of its stronger brand presence, geographical diversification, robust digital network, brand innovation, and a diversified business model as compared to Skechers.

Our conclusion is based on our detailed dashboard analysis, Nike Looks Cheap vs. Skechers U.S.A. ‘ wherein we compare trends in key metrics for the two apparel companies over the years to determine their relative valuations under the current circumstances.

  • Skechers derives roughly 45% of its revenues from North America, while Nike makes less than 40% of its sales from the region.
  • Moreover, Nike has a strong foothold in China, which is one of the fastest-growing apparel markets in the world. Although Skechers is also growing in China, its presence is limited as compared to that of Nike’s.
  • Further, Nike has a stronger balance sheet, with the company having a comfortable $8.8 billion in cash reserves as per the latest report, while Skechers’ cash reserves stood at around $1.5 billion.
  • Additionally, Nike has a wider product portfolio, which ranges from footwear and apparel to eyewear, accessories, and even equipment. On the other hand, Skechers is primarily a footwear dominated brand.
  • Finally, Nike has a robust digital network. Nike’s digital sales increased 75 percent in the Q4 2020 (ending May) led by double-digit increases across all geographies- accounting for approximately 30% of total revenue.

Why Has Nike Stock Outperformed Over Recent Weeks?

Nike’s P/E has increased from 40x to around 43x in 2020, while Skechers’ multiple has contracted from 19x to about 13x. The increase in Nike’s multiple can be attributed to Nike’s strong digital network, as well as a stronger brand presence as highlighted above.

Although Skechers’ multiple has declined, it still seems to be elevated considering that the company’s revenues and margins are at a greater risk compared to Nike’s. On the flip-side, Nike’s multiple is trading at a similar level to the 2019 figure and seems to be appropriately priced while Skechers’ P/E is higher than the level seen at the end of 2018 – indicating that the market hasn’t quite priced in the negative impact of weaker revenues and margins on the company’s stock. This leads us to believe that Skechers’ stock could be vulnerable. Overall, despite Skechers seeming to have a lower valuation, we prefer Nike due to the reasons stated above.

But How Long Will Skechers Stock Remain Under Pressure?

  • The expected timeline for recovery in global economic conditions, and in Skechers’ stock, hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.
  • Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture and complements our analyses of the coronavirus outbreak’s impact on a diverse set of Skechers’ multinational peers, including Nike and Lululemon. The complete set of coronavirus impact and timing analyses is available here.
  • We believe there will be a recovery in demand for most sectors by early September, with the gradual lifting of lockdowns and a gradual rise in the number of Covid-19 cases remaining within the manageable capacity of hospitals and care providers.
  • Although most companies will report poor Q2 results, market expectations will be buoyed by a visible improvement in the situation on the ground.

 

What if you’re looking for a more balanced portfolio instead? Here’s a top quality portfolio to outperform the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk. It has outperformed the broader market year after year, consistently.

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