Sports brands Nike and Adidas are experiencing unprecedented global demand for their apparel and footwear brands. Last year’s sales for each company went up by double digits, driving profits even higher.
Today, I’m going to compare each company against the other to determine which one to recommend first for investors.
Both stocks are valued equally at this point in time, although Nike seems to be growing at a slightly faster pace. For that advantage investors do need to pay a bit of a premium, while forgoing a higher dividend from Adidas. There are several other differences between the two investments as well.
Nike Has a Stronger Brand
The reason Nike has been so successful in building it’s company into such an amazing powerhouse across the world is due in large part to the strength of its brand. Nike and Jordan are among the most preeminent and recognizable brands in the world, Nike owns the running market, while Jordan has the basketball segment covered.
Contrast that with Adidas, who almost exclusively relies on its Adidas brand, which is also among the most iconic and recognizable across the world. Like Nike, Adidas encompases many different sports as well as product categories. Of all company sales last year, Adidas contributed 82%, while Reebok made up just 10%. In this respect, Nike wins due to a much deeper brand portfolio.
Nike & Adidas Tied in Terms of Sales Growth
Although Nike started with a larger base, it still was able to grow at a faster pace than Adidas did last year, and at the same time post a broader-based growth. The company enjoyed a 14% increase in sales across every geographical area. Growth was strongest in North America, then Western Europe, followed by China then Central and Eastern Europe.
Adidas lagged behind, but just slightly because it did enjoy a 30% uptick in Western Europe, 16% spike in China and an 8% increase in North America. Prospects for the upcoming year looks better for Adidas. The company is forcasting an 11% growth in revenue for fiscal 2016, whereas Nike is only forecasting mid-single digit sales gains.
Adidas Enjoying Higher Profits
In terms of earnings between the two companies, Adidas wins. Its gross profit margin is 48%, which represents a nice increase of 0.6% over the previous year. Nike also improved their profitability, but it was slightly lower at 47%. This gap has persisted for years and the prediction is that it will go up in the months ahead because Nike is having to work its way through the excess inventory that exists in the U.S. market. Due to this management is projecting a decline of 0.5% in gross margin before it rebounds.
Interestingly enough, I went online to the Fanatics website and compared the availability of Adidas and Nike NCAA college football jerseys. Fanatics is a great online sports apparel store for sports enthusiasts. Not only did Fanatics offer substantially more Nike NCAA jerseys for consumers to buy, but they charged a greater price than Adidas. They offered 341 Adidas jerseys compared to 4762 Nike jerseys! Nike also had 60 custom football jerseys compared to Adidas 14 custom jerseys. This may be part of Nike’s excess inventory referred to in the last paragraph.
Adidas’ stock has actually outperformed Nike’s throughout the last year, with Adidas’ going up 31% as compared to Nike’s 48%. This means these companies have almost the same valuation, which is approximately 31 X past year’s profit and 25 X next year’s earnings.
Considering all of this, investors might be better off if they bought Nike stock at these prices. Of course, the growth in profit might be disappointing this year, but its tremendous leadership in the industry, its deeper and stronger brand portfolio, plus its ability to spend more money on product innovations and advertising lead us to conclude that the company will enjoy more increases in earnings over the long term.