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Under Armour isn’t reaching the type of success Nike has: Analyst

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David Swartz, Morningstar Research Equity Analyst, joins Yahoo Finance Live to break down Nike's latest earnings report and discuss what's next for the athletic manufacturer.

Video Transcript

[MUSIC PLAYING]

JULIE HYMAN: As we highlighted, shares of Nike are trading higher this morning. That's after the company came out with sales that just about doubled, coming in at a record on a quarterly basis. Nike says for its full fiscal year, sales will be about $50 billion. Let's bring in David Swartz to talk about this. He is Morningstar research equity analyst. David, thanks for being here this morning.

So as you wrote in your note reacting to the earnings, it came in, things are basically firing on all cylinders for Nike. The problem as you see it, I guess, is the valuation of the company that's relatively expensive right now. How much would Nike have to be growing to justify the price where it's trading right now?

DAVID SWARTZ: Right now it's trading at about 35 times forward earnings. So that's pretty aggressive, although not that unusual for Nike. So you'd have to be looking for earnings growth of 20-plus percent really to justify that kind of valuation, and Nike can do that. But this is an industry that doesn't grow at that rate. So Nike would have to gain market share consistently over the next several years to be able to put up those kind of numbers.

BRIAN SOZZI: David, Nike stocks trading at about $153, up 15% or so, your fair value estimate is $118. How do you see the stock getting to that level?

DAVID SWARTZ: Well, I may raise my fair value estimate a little bit, but I do think it is expensive at its all-time high now, over $150 for the first time. You know, there have been times when Nike's stock price has had some difficulties. And I would look for those opportunities probably to buy it rather than buy when it's at its all-time high.

I mean, right now we've seen a perfect situation for the market. In the last quarter, we had the government stimulus, we had the vaccinations. We just had incredible numbers across the board for everybody really in the athletic apparel industry. And so it is going to moderate as we go forward into the rest of this year and then into next year.

BRIAN SOZZI: Do you like Under Armour stock better?

DAVID SWARTZ: Under Armour, I think, is also overpriced. It's up quite a bit over the past year, and Under Armour is not having the kind of success that Nike's having.

JULIE HYMAN: And David, obviously as you talked about, there's some macro trends that are benefiting these companies. But there's also execution on the part of Nike, which seems to be-- I don't know if it's pitch perfect, if that would be your characterization, but what do you think not just on a macro basis but on an execution basis could go wrong for Nike in the coming year?

DAVID SWARTZ: Nike's undergoing a major transition here from being a wholesale heavy company to being a direct-to-consumer company, especially through its own apps and online sites, like its sneaker app, and it's doing extremely well with that right now. But there is some risk that losing those wholesale customers could affect its sales at some point. Right now we're seeing very high demand for every kind of athletic shoe.

We've seen a big move towards collectibles over the past year during the pandemic. And that has included Nike shoes. There is a possibility that that could slow down at some point because fads do tend to end at some point. And so maybe shoes won't be as collectible two years from now as they are today. And so that would affect Nike more than it would have in the past because its wholesale business is going to be smaller.

BRIAN SOZZI: So, David, you think the market is just flat out wrong sending the stock up 15% this morning?

DAVID SWARTZ: No. No, I don't. I don't. I understand why the market's reacting the way that it is. I mean, Nike has always been an expensive stock, and right now it has the numbers to justify that kind of valuation. So I can certainly understand that and the outlook is extremely strong. Actually yesterday, probably even more important than the earnings report, Nike put out 2025 guidance unexpectedly and the guidance was extremely strong. It was above my long-term expectations. So I think that actually accounts for more of the stock price move today than just the earnings themselves.

BRIAN SOZZI: If you don't really like Nike or Under Armour, what are some of your favorite retail stocks into year end?

DAVID SWARTZ: Well, one that I might highlight would be Hanesbrands. So Hanesbrands is in the athletic space because it owns Champion. But Hanes is a lot cheaper than Nike. And Hanes does not have the same kind of growth profile that Nike does because, obviously, it sells a lot of socks and underwear and basic stuff. But it also does have Champion which does have a lot of potential, and is growing rapidly, and does very well with a younger demographic. So I would probably look at Hanes perhaps as a cheaper alternative.

JULIE HYMAN: People always need socks and underwear, don't they?

DAVID SWARTZ: Yeah.

JULIE HYMAN: David, finally, just quickly back to Nike for a final question on China. Because, obviously, we saw some disappointing sales there in the quarter. What happens next there and how important a part of Nike's story is that going to be going forward?

DAVID SWARTZ: Yeah. So in April, Nike as well as Adidas and some other companies were hit by a nationalistic boycott, where Nike got caught up in this controversy over forced labor in Western China. That has faded already, and Nike said this yesterday on its earnings call. The effect was pretty substantial in April, but it has faded in May and June, and I think it's really transitory.

There have been controversies in China in the past that have affected international apparel firms, like Nike, and they tend to fade pretty quickly. Unless this controversy gets bigger and Nike gets more involved in it, I don't think it's going to have a big impact on Nike sales.

JULIE HYMAN: Gotcha. Thank you, David. Thanks a lot for your perspective this morning. David Swartz is Morningstar research equity analyst who covers, obviously, Nike and some of the other apparel companies.