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John OMalley

FIN 333
Elliot
03/19/2015

Final Project: Nike vs. Under Armour


Competitive Environment
In the athletic apparel and sportswear industry, two of the most universally recognizable
brands are Nike and Under Armour. Since its inception, Nike has grown from a small running
shoe company out of Oregon into a global athletic footwear and apparel giant. At the same time,
Under Armour has followed a similar path, as it grew from a small company in its founders
grandmothers basement into the market force that it is today. Although both companies came
from humble beginnings, that did not stop them from evolving into the giant multi-national
corporations we know them to be today.
The global sportswear and athletic apparel industry is highly fragmented, with a myriad
of different companies competing for shares of the market. The market is as fragmented as it is
because there are such a wide variety of different types of brands competing with one another,
from discounted athletic brands such as Champion to high-end brands like Nike or Adidas.
Sports apparel and footwear sales have increased by 42% to $270 billion1 over the last
seven years and while this has made some experts skeptical that the industry is due for a letdown,
research done by Morgan Stanley suggests quite the opposite, as they are predicting a very
bullish outlook for the next five years. In fact, they estimate that the industry could add an
additional $83 billion in sales by the year 2020, or growth of more than 30%. This success has
been due to several factors, but has largely been driven by an increased focus on fitness and
1 http://www.morganstanley.com/ideas/global-athletic-wear-geared-for-growth

healthy living, especially among young adults, across the globe. While the United States is still
the largest market for athletic apparel products, another key market to watch will be China. The
Chinese government has emphasized the need to support youth athletic participation, and plans
to build 60% more sports facilities by 2025 in an attempt to get 500 million of its citizens to
exercise regularly. It will be very interesting to see if the market for athletic apparel and
sportswear is able to meet the lofty expectations that have been set for it over the next few years.
The athletic apparel market is very competitive both domestically and globally. In both cases,
Nike has a stranglehold on the market share. While Under Armour is not the same force globally
as it is domestically (90% of its revenues come from the U.S.), it is Nikes closest competitor in
the United States, having overtaken Adidas for the second greatest market share as recently as
last year. In the domestic athletic apparel market, Nike has a market share of 13%, while Under
Armour is at 6%.2 Some of the other big names in the market include, Lululemon, Puma, and
Adidas.
In order to keep up with the exponential growth of the apparel market, it is imperative for both
Nike and Under Armour to have an effective strategic position moving forward. One component
of Nikes strategic position is spending more than the rest of the competition on marketing. In
2015, Nike spent over $3.2 billion on demand creation which is a buzzword for marketing.
When you do the math, thats almost $9 million spent per day and over $100 spent per second by
Nike on marketing. Included in these numbers are the numerous sponsorship contracts that Nike
has signed with some of the worlds top athletes. Some notable athletes that are contracted by
Nike include: Michael Jordan, Kobe Bryant, LeBron James, and Tiger Woods. While these
numbers may seem gaudy, it is this emphasis on brand recognition that has allowed Nike to
2 http://marketrealist.com/2015/06/nike-market-share-gets-high-score-activewear/

develop into the global powerhouse that it is today. Another component of Nikes strategic
position is the fact that it holds 25% of the global market for athletic shoes.3 This means that
even if the athletic apparel bubble bursts at some point in time, Nike will be in a good position to
combat the negative effects of the burst because they are already so deeply entrenched in the
athletic shoe market. Another component of Nikes strategic position is their investment into
technology related to athletic apparel. Nike has already developed several products including the
Fuel Band and t-shirts with sensors that measure heart rate, and will continue to invest in these
technologies and apps associated with them in the future.
While Under Armour does not have the same resources as Nike to invest as heavily in marketing,
it does mirror several of its strategic positions. Like Nike, Under Armour has made great strides
in signing endorsement deals with some of the worlds best athletes. One such example is their
agreement with Steph Curry, the reigning NBA Most Valuable Player and arguably the best
basketball player in the game. If this agreement can be even a fraction of the success that similar
deals that Nike has made Michael Jordan and LeBron James have been, then it certainly puts
Under Armour in a favorable position moving forward. At the same time, Under Armour also has
invested heavily in technology. Recently, Under Armour released an app called Record that
already has over 120 million users, making it one of the most popular fitness apps available in
the market place. Additionally, Under Armour is also well-prepared for the athletic apparel
bubble to burst because a large percentage of its sales are in shoes, having increased by 44% over
the last fiscal year.

3 http://www.fool.com/investing/general/2015/04/12/can-nike-inc-and-under-armour-incsurvive-an-athle.aspx

In short, while there is debate over whether or not an athletic apparel bubble is looming,
both companies are in a solid strategic position moving forward due to large market shares of
athletic shoe sales, increased emphasis on athletic apparel-related technology, and brand
recognition created through marketing and sponsorship agreements with the worlds best
athletes.

Qualitative Analysis
Nike and Under Armour are two of the premier brands associated with athletic apparel
and sportswear. In fact, Nike is the worlds largest seller of athletic apparel and sportswear, while
Under Armour has been one of the fastest-growing companies in the industry, although the
majority of its growth has taken place in the United States, over the last decade. However, while
they are both key players within their own industry, it is important to remember that Nike is still
a much larger company than Under Armour, making it difficult to compare them based on solely
on their balance sheets and income statements. Instead, it is useful to compare the two companies
based on their financial ratios, which can be found in the corresponding excel document.
Liquidity ratios are financial metrics used to determine a companys ability to pay off its
short-term debts and obligations, making them a useful measurement of a companys short-term
solvency. The current ratio is a measurement of a companys current assets divided by its current
liabilities. Nikes current ratio has been on the decline over the last three years, decreasing from
3.44 in 2013 to 2.72 in 2014, and 2.52 in 2015. Under Armours current ratio rose from 2.65 in
2013 to 3.67 in 2014, but then declined to 3.13 in 2015. The quick ratio is a similar measurement
of solvency, but it is slightly more rigorous because it takes out inventory, which is considered to
be the least liquid of the current assets. Nikes quick ratio has also been on the decline for the last
three years, dropping from 2.56 in 2013 to 1.94 in 2014 and 1.84 in 2015. Under Armours quick

ratio rose from 1.26 to 1.36 from 2013 to 2014, but then was cut by more than half in 2015,
dropping all the way down to 0.60. This can be explained by the fact that Under Armour carried
a great deal of additional inventory in 2015 compared to 2014 and 2013. The final important
liquidity ratio to consider is the cash flow liquidity ratio, which is important because it is a
measurement of the companys truly liquid assets. Just like its quick and current ratios, Nikes
cash flow liquidity ratio declined from 1.61 in 2013 to 1.04 in 2014, but then rose again in 2015
to 1.35. Under Armours results were the opposite, as it increased from 1.10 in 2013 to 1.93 in
2014 before declining to 0.18 in 2015.
From this data, we can infer that Nike is in a marginally better position than Under
Armour in regards to solvency. Although Under Armour had a higher current ratio than Nike,
upon further examination, it can be determined that this was because Under Armour has a great
deal more inventory on its balance sheet than Nike, as evidenced by its lower Quick Ratio. Nike
also had a better cash flow liquidity ratio than Under Armour in fiscal years 2013 and 2015,
meaning Nike was more financially solvent in both years when comparing truly liquid assets.
Another important factor to consider when analyzing these liquidity ratios is that Under Armour
actually had negative cash flow from operations ($ -44,104) in 2015, making them even riskier in
terms of solvency.
Activity Ratios are financial metrics used to measure a firms ability to convert different
balance sheet accounts into cash or sales and are important because they determine whether the
company is doing a good job of generating revenues from its resources. Accounts receivable
turnover measures how many times accounts receivable can be converted into cash. Nikes
accounts receivable turnover declined from 8.12 in 2013 to 8.10 in 2014, but then rose again to
9.11 in 2015. Under Armour declined each of the three years, dropping from 11.11 in 2013 to

11.02 in 2014 to 9.14 in 2015. Inventory turnover measures how fast inventory is selling. Nikes
inventory turnover declined each of the three years from 4.10 in 2013 to 3.89 in 2014 to 3.81 in
2015. On the other hand, Under Armours inventory turnover rose from 2.55 in 2013 to 2.93 in
2014, but then declined to 2.63 in 2015. Payables turnover is a measurement of how often
accounts payable are actually paid, and the lower the ratio is, the longer the company takes to
pay off its debts. Nikes payables turnover declined each of the three years from 8.56 in 2013 to
7.95 in 2014 and 7.76 in 2015, an improvement in each year. In contrast, Under Armours
payable turnover rose each of the three years from 7.22 in 2013 to 7.47 in 2014 and 10.27 in
2015. Fixed asset turnover and total asset turnover measure how effective a company is at
generating sales from investments in assets. Fixed asset turnover only considers investments in
Property, Plant, and Equipment, while total asset turnover considers all assets on the balance
sheet. Nikes fixed asset turnover declined from 10.32 in 2013 to 9.81 in 2014, but rose in 2015
to 10.16. Under Armours fixed asset turnover declined each of the three years from 10.41 in
2013 to 10.09 in 2014 and 7.36 in 2015. Nikes total asset turnover rose from 1.44 in 2013 to
1.50 in 2014 and 1.42 in 2015, remaining fairly stagnant. Under Armour experienced similar
stagnancy, but declined each year from 1.48 in 2013 to 1.47 in 2014 and 1.38 in 2015.
From this data, we can infer that both companies are in a similar position in regards to
their ability to convert different balance sheet accounts into cash. While Nike may have had a
more favorable inventory turnover ratio, Under Armour had a better accounts receivable
turnover, while the other three ratios were either strikingly similar (Total Asset Turnover) or
varied from year to year. In other words, both companies are similarly capable of converting
balance sheet accounts into cash.

Leverage Ratios are a measurement of the value of equity in a company compared to its
debt obligations. These ratios analyze how much capital comes in the form of debt and are
important because they paint a picture of how debt fits into the companys capital structure. The
debt ratio measures the extent of the firms financing with debt. It considers the proportion of all
assets financed with debt. The higher the ratio, the riskier the capital structure. Nikes debt ratio
rose from 36.84% in 2013 to 41.79% in 2014, then declined to 41.17% in 2015. Under Armour,
on the other hand, rose each year from 33.24% in 2013 to 35.55% in 2014 and 41.85% in 2015.
Times interest earned is another measurement of a companys ability to honor its debt payments
and is calculated by dividing operating profit (EBIT) by interest expense. Unlike the debt ratio,
the higher the times interest earned ratio is, the better. The same is true of the cash interest
coverage ratio, which measures how many times interest payments can be covered by cash flow
from operations before interest and taxes. It is similar to the times interest earned ratio, but also
considers interest paid and taxes paid. Nikes times interest earned ratio and cash interest
coverage ratio both rose each of the three years, while in contrast both ratios declined for Under
Armour each of the three years.
From this data, we can infer that Nike is in a better position than Under Armour in terms
of leverage. While Under Armour and Nike have similar debt ratios, Under Armours has
increased each of the last three years, which could be a cause for concern among investors. At
the same time, Nike had a considerably better times interest earned ratio and cash interest
coverage ratio, both of which increased from year to year while Under Armours ratios declined
each of the three years. This does not paint a pretty picture of how debt fits into Under Armours
capital structure, and gives Nike a clear advantage in this area.

Profitability ratios are financial metrics used to asses a companys ability to generate
earnings in comparison to its expenses and other relevant costs. For most of these ratios, the
higher the value is, the better the company is doing. Gross profit margin, operating profit margin,
and cash flow margin all represent the firms ability to translate sales dollars into profits at
different stages of measurement. Gross profit margin shows the relationship between sales and
cost of goods sold and measures the ability of the company both to control costs associated with
inventory and the ability to pass along price increases through sales to customers. Nikes gross
profit margin rose each of the three years from 43.59% in 2013 to 44.77% in 2014 and 45.97% in
2015. Under Armours gross profit margin rose from 48.74% in 2013 to 49.03% in 2014, then
declined to 48.08% in 2015. Operating Profit Margin measures overall operating efficiency and
includes all expenses associated with ordinary business activities. Once again, Nikes operating
profit margin rose each year from 12.79% in 2013 to 13.24% in 2014 and 13.64% in 2015. At the
same time, Under Armours operating profit margin rose from 11.37% in 2013 to 11.48% in
2014, but once again declined in 2015 to 10.31%. Net profit margin measures profitability after
considering all revenues and expenses, including interest, taxes, and non-operating items.
Mirroring its operating profit margin and gross profit margin, Nike once again experienced
increases in each of the three years, rising slightly from 9.68% in 2013 to 9.69% in 2014 and
10.70% in 2015. In contrast, Under Armours net profit margin declined each year from 6.96% in
2013 to 6.75% in 2014 and 5.87% in 2015. Cash flow margin is a similar profitability ratio that
examines the relationship between cash generated from operations and sales. It measures the
ability of the company to translate sales into cash. Nikes cash flow margin declined from
11.98% in 2013 to 10.84% in 2014, but then increased to 15.29% in 2015. In each of the three
years, the cash flow margin was higher than the net profit margin, which is the result of strong

positive cash generation. Under Armours cash flow margin rose from 5.15% in 2013 to 7.10%
in 2014, then declined to -1.11% in 2015 due to the fact that Under Armour produced negative
cash flows from operations in 2015. Both return on assets (ROA or ROI) and return on equity
(ROE) measure the overall efficiency of the company in managing its assets and in generating
return to shareholders. Return on assets indicates the amount of profit earned relative to the level
of investment in total assets. Nikes ROA increased each of the three years from 13.97% in 2013
to 14.48% in 2014 and 15.15% in 2015. In contrast, Under Armours ROA declined each year
from 10.29% in 2013 to 9.93% in 2014 and 8.11% in 2015. Return on Equity measures the
amount of profit earned relative to the level of shareholders equity. Again, Nike experienced
increases in ROE in all three years, rising from 13.97% in 2013 to 14.48% in 2014 and 15.15%
in 2015. On the other hand, Under Armours ROE remained stagnant at 15.41% from 2013 to
2014 then declined to 13.94% in 2015. Cash return on assets is another useful financial metric
that offers a comparison to return on investments and measures the cash-generating ability of the
firms assets. Nikes cash return on assets declined from 17.28% in 2013 to 16.20% in 2014, but
then rose to 21.67% in 2015. Under Armours cash return on assets rose from 7.61% in 2013 to
10.45% in 2014, but then declined to -1.54% in 2015, again due to the fact that it produced
negative cash flows from operations that year. Finally, earnings per share is a measurement of
earnings relative to the number of shares outstanding. Nikes earnings per share increased each
year from $2.74 in 2013 to $3.05 in 2014 and $3.80 in 2015. The same was true for Under
Armour, as earnings per share rose from $0.77 in 2013 to $0.98 in 2014 and $1.08 in 2015.
From this data, we can infer that Nike is in a better position than Under Armour in terms
of profitability. While Under Armour may have had a moderately better gross profit margin than
Nike, Nike had a moderately better operating profit margin than Under Armour and noticeably

better numbers in every other category. Nike also experienced increases in every measure of
profitability from 2013 to 2015 while Under Armour saw a decline in every measure of
profitability except for earnings per share during that same. This does not bode well for Under
Armour, and could potentially foreshadow more declines to come in the future. On the other
hand, these profitability ratios suggest a very positive outlook in the future for Nike, the success
of which shows that management has made strides in improving profitability across the board.
In conclusion, although Nike and Under Armour are different-sized companies, they are
still two of the strongest forces in the athletic apparel and sportswear industry today. Although up
until recently it looked as if Under Armour were starting to bridge the gap between the two, from
this selected data, we can determine that Nike is clearly the better of the two companies to invest
in. Although both companies are in a similar position in regards to their ability to convert
different balance sheet accounts into cash based on their activity ratios, Nike was in a better
position than Under Armour in most other measurable ways. According to the liquidity ratios,
Nike is in a marginally better position than Under Armour in terms of solvency. At the same
time, Nike also has a better capital structure in regards to debt according to the leverage ratios
and is also in a better position to generate earnings in comparison to expenses according to the
profitability ratios. Another factor to consider when comparing these two similar companies is
that Morgan Stanley, a global financial services and ratings firm, recently downgraded Under
Armour from equal-weight to under-weight, while Nike is graded at over-weight, further
exemplifying why Nike would be the preferred choice to invest in of the two companies. While it
is completely plausible that both companies could prove to be solid investments, declining ratios
for Under Armour, coupled with increasing ratios for Nike make Nike the clear choice of the
two.

Works Cited
http://finance.yahoo.com/q/hp?
s=UA&a=11&b=31&c=2013&d=02&e=19&f=2016&g=d&z=66&y=528

http://www.morganstanley.com/ideas/global-athletic-wear-geared-for-growth

http://www.marketwatch.com/story/under-armour-shares-slide-8-on-concerns-company-islosing-market-share-2016-01-11
http://www.aaii.com/journal/article/16-financial-ratios-for-analyzing-a-companys-strengths-andweaknesses.touch
https://www.sec.gov/Archives/edgar/data/320187/000032018714000097/nke5312014x10k.htm#sDEC0DE14F0EF7AAB10F47162AF647AE7
http://investor.underarmour.com/secfiling.cfm?filingID=1336917-16-64&CIK=1336917
http://investor.underarmour.com/secfiling.cfm?filingID=1336917-16-64&CIK=1336917
http://s1.q4cdn.com/806093406/files/docfinancials/2015/ar/docs/nike-2015-form-10K.pdf