Nike vs. Skechers: Which Retail Stock Is a Better Buy?
Nike and Skechers are fundamentally strong retail companies that have outpaced peers and the broader markets in the last 10 years.
June 16, 2022

While the ongoing sell-off surrounding equities might scare novice investors, stock market veterans will be looking to buy quality stocks at a discount. In a bear market where companies are faced with a range of macro-economic challenges, it's essential to identify stocks with strong fundamentals and robust cash flows.

Here, we compare two such retail stocks in Nike (NYSE: NKE) and Skechers (NYSE: SKX) to see which is a better buy right now. Shares of Nike are trading 37% below all-time highs, and Skechers stock is down 33% from record levels.

Despite this recent pullback, both stocks have outpaced the broader markets. Since June 2012, Nike has returned 384% to investors while Skechers has surged 445%.

Nike: Bull vs. Bear arguments

Valued at a market cap of $175 billion, Nike is one of the world's most recognizable brands. Nike successfully navigated retail store closures amid the ongoing pandemic as it significantly increased its online presence.

Nike's sales rose from $37.4 billion in fiscal 2020 to $44.5 billion in fiscal 2021 (ended in April). In its most recent quarter, Nike's online sales stood at $4.6 billion, increasing 15% compared to the year-ago period. Total sales were up 5% at $10.9 billion.

In the first nine months of fiscal 2022, its sales have risen by 7% year-over-year. Analysts expect Nike's top line to increase by 4.9% to $46.74 billion, while adjusted earnings might rise 4.5% to $3.73 per share in fiscal 2022.

Over the years, Nike has reduced its number of channel partners allowing the company to widen gross margins to 48.4% in fiscal 2022 from 43.8% in fiscal 2018. Further, as direct-to-consumer sales will account for a larger portion of revenue, its profit margins should continue to expand.

Analysts forecast Nike's adjusted earnings to rise at an annual rate of 15.3% in the next five years.

On the other hand, Nike stock continues to trade at a premium given current market conditions. It's valued at 3.8 times forward sales and 29.5x forward earnings. Nike's levered free cash flow stood at $3.63 billion, which means its trading at 48 times trailing cash flows.

Skechers: Bull vs. Bear arguments

Skechers is a mid-cap retail company valued at a market cap of $5.72 billion. It has increased sales from $4.6 billion in 2018 to $6.28 billion in 2021. In the last five years, Skechers, the third-largest footwear company globally, increased sales at an annual rate of 13%, while adjusted earnings grew by 26% each year.

In Q1 of 2022, revenue rose by 27% to $1.8 billion, and the company is forecast to report sales of $7.35 billion in 2022, up 16.9% year-over-year. Unlike Nike, Skechers is exceptionally cheap, and is valued at 0.77x forward sales and a price-to-earnings ratio of just 12.7x. Further, analysts expect adjusted earnings to grow at an astonishing annual rate of 72.3% in the next five years.

While free cash flow has trailed earnings, the company has successfully funded its store base growth at 16% each year without raising additional capital.

There are no inherent risks to Skechers investors in terms of fundamentals. But, the stock might move lower if supply chain issues continue, which may impact revenue and margins.

So, which stock is a better buy?

Skechers is growing revenue and profits at a faster pace compared to Nike. It's also trading at a much lower valuation, making Skechers a much better buy right now. Analysts tracking Nike expect the stock to gain 45% in the next 12 months, while Skechers is trading at a discount of 60% to consensus price target estimates.

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