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Skechers or Under Armour: Which Footwear Stock Is Poised To Recover Faster?

The holiday season is the most important business period for retailers and accounts for a notable chunk of their annual sales. Sales of athletic apparel and footwear have improved in the third quarter due to the reopening of stores following COVID-related closures and continued strength in e-commerce channels.

However, Matt Powell, NPD’s Senior Industry Advisor-Sports, expects a challenging holiday season for the sports retailers due to the pandemic. He expects both athletic footwear and activewear apparel sales to decline in the low single-digits in 4Q. There are some bright spots, with Powell expecting robust running shoes and hiking and cold weather boots sales this holiday season. 

Bearing in mind a difficult retail landscape, we will use the TipRanks Stock Comparison tool to pit Skechers and Under Armour against each other to choose the better investment opportunity.  

Skechers (SKX)

Skechers has taken its place as one of the fastest growing footwear brands in recent years. The company rapidly expanded its presence in the international markets, which accounted for about 58% of 2019 sales. Pandemic-led retail store closures hurt the company’s growth plans and caused a 42% year-over-year decline in 2Q sales. However, Skechers fared better in 3Q due to the reopening of the economy following the easing of lockdown mandates.

Its 3Q sales fell 3.9% year-over-year to $1.3 billion. The company’s domestic wholesale business returned to growth, increasing 6.3% due to pent-up demand. That said, international wholesale sales dropped 0.5% due to continued challenges in the distributor-led markets. Direct-to-consumer (includes retail locations and e-commerce) sales fell 16.9%, as a 172.1% gain in domestic e-commerce sales was more than offset by lower store sales in the domestic as well as international markets.

The company has, however, experienced double-digit growth in key international markets like China, Germany and Australia. Overall, lower sales and higher expenses resulted in a 20.9% decline in 3Q adjusted EPS to $0.53. 

Meanwhile, Skechers is investing in its digital capabilities to support growing e-commerce sales. In 3Q, the company launched a new website and two mobile applications. It also rolled out buy online, pick up in-store and buy online, pick up at curb options in the majority of its US stores and updated its in-store point-of-sale systems.

To further boost its e-commerce growth, Skechers is set to upgrade its e-commerce platforms in Canada, Europe, Japan, India and South America. It has also expanded its European distribution center and opened new distribution centers in Panama and Colombia.

Coming to store footprint, Skechers opened 24 company-owned stores and 189 third-party Skechers stores globally in 3Q. The company ended the quarter with 3,770 stores. (See SKX stock analysis on TipRanks)

Despite the better-than-anticipated 3Q performance, Susquehanna analyst Sam Poser downgraded Skechers to Hold from Buy and lowered the price target to $35 from $41 due to a lack of visibility on the outlook. The analyst noted, “Despite beating 3Q20 EPS and revenue expectations, the outlook is not as robust as expected. Inventory levels are elevated, and G&A [general and administrative] dollar spend appears high.”

Poser also feels that in the short-term, the company’s excess inventory could result in margin pressure for at least the next two quarters.

The Street is cautiously optimistic about Skechers, with a Moderate Buy analyst consensus based on 3 Buys, 2 Holds and no Sell ratings. With shares down 23.1% year-to-date, the average price target of $41.25 indicates an upside potential of 24.1% in the coming months.

Under Armour (UAA)

The pandemic threw additional challenges at Under Armour when it was already under pressure. It has faced various issues like slowing sales growth due to lack of innovation, heightened competition from Nike and Adidas and the SEC’s investigation into the company’s accounting practices. 

Moreover, the footwear and apparel company relies heavily on wholesale channels, which include specialty and independent retailers, department stores and off-price retailers. This dependence diluted the brand’s premium image and impacted its margins as well. As part of its transformation strategy, Under Armour is focusing on premium wholesale distribution to protect its brand and is reducing its exposure to the off-price channel and other undifferentiated distribution points.

Even in its DTC or direct-to-consumer business (which includes the company’s brand and factory house stores and e-commerce), Under Armour intends to drive its premium brand positioning by pulling back on promotions and discounts. The company is also investing in innovation and its recent product offerings in the women’s category include the Infinity sports bra, Meridian leggings and the UA HOVR Breakthru basketball shoe.

Meanwhile, the pandemic-led store closures had a significant impact on Under Armour. Revenue declined 23% and 41% in 1Q and 2Q, respectively. Having said that, the reopening of stores along with strong online sales helped the company deliver better-than-expected results for the third quarter. Revenue increased marginally to $1.43 billion in 3Q while adjusted EPS grew 13% to $0.26.

The 3Q top line gained from a 17% rise in DTC revenue, mainly driven by a 50% increase in e-commerce sales. However, wholesale business declined 7% primarily due to weakness in North America. In terms of product categories, footwear and accessories revenue grew 19% and 23%, respectively, while apparel revenue fell 6% in 3Q. (See UAA stock analysis on TipRanks)

Looking ahead, Under Armour now anticipates that revenue will decline at a low-teen percentage rate in 4Q, marking an improvement from the previous outlook of a 20%-25% decline. For the full year, it expects revenue to fall at a high-teen percentage rate.

On Nov. 17, Wells Fargo analyst Tom Nikic upgraded Under Armour to Buy from Hold and increased the price target to $23 from $15. In a research note to investors, the analyst stated, “In recent years, we’ve seen several big turnarounds by athletic brands (LULU, Adidas, etc.), and we think UAA is poised to be the next. After years of struggles, we believe that the brand is finally starting to turn (as evidenced by the first positive DTC comp in over 3 years in 3Q), and we believe investors will look toward this stock given its lagged athletic peers significantly YTD.”

UAA’s Moderate Buy analyst consensus is based on 6 Buys, 12 Holds and 1 Sell. Shares have plunged 22.7% so far this year and the average price target of $15.47 implies further downside potential of 7.3% from current levels. 

Conclusion

Skechers’ operational performance was better than Under Armour’s prior to the pandemic (Skechers’ sales grew 12.5% in 2019 while Under Armour’s sales rose 1.4%). Under Armour’s turnaround efforts are helping it to move in the right direction. However, Skechers appears well-positioned to bounce back faster when the pandemic fades. Moreover, the Street estimates indicate a recovery in Skechers’ stock in the coming months, making it a better pick than Under Armour currently.

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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment