Stay long and strong on shares of rebounding Nike (NKE) , rather than trying to catch a falling knife in struggling Under Armour (UA) .
After a challenging 18 months for Nike, in which Wall Street questioned its dominance (and the stock's premium valuation) amid the uprisings of Adidas (ADDYY) and Under Armour, the company has fallen back into the good graces of Wall Street. Shares of the sneaker giant have been one of the top-performers on the scorching-hot Dow Jones Industrial Average this year, rising nearly 11%.
There are at least several reasons behind the move in Nike's stock -- a move that should be held in higher regard, considering the U.S. dollar has remained strong (which will continue to weigh on Nike's sales and profits). While Nike's second glance could simply be Wall Street wanting to stay invested in an athletic-wear play amid continued strong demand, and not wanting exposure to the weakened Under Armour, a good portion of the revival is Nike-driven.
"We believe footwear remains robust, given ongoing innovation, and we anticipate signature basketball [sneakers] to accelerate in the near-term, given [product] newness," says Jefferies analyst Randal Konik. "We believe the competitive landscape is improving in favor of Nike."
Here are the top factors behind the call:
1. Finally, Nike discounting has cooled off due to improved inventory levels.
Nike has worked hard over the last two quarters to clean up excess inventory that was finding its way in droves to off-price retailers such as TJX Companies (TJX) . In turn, that was cheapening Nike's brand, hurting its profits and concerning Wall Street. But, as Konik points out, discounting on Nike products is at its lowest levels in six months. Meanwhile, discounting on Under Armour products remains very elevated.
This is something yours truly has seen consistently in recent months -- Marshall's, a division of TJX Companies, is flooded with Under Armour product, in part because of the bankruptcy of several sportswear retailers and store closures by Macy's (M) .
Definitely weird seeing racks of Under Armour stuff at Marshalls $TJX cc: @jimcramer pic.twitter.com/M7geoxTKj6— Brian Sozzi (@BrianSozzi) December 15, 2016
2. Nike basketball is in recovery mode.
Due to a focus on bolstering product innovation and sharpening price points, Nike's important basketball sneaker business continues to turn the corner. It probably also helps Nike that Under Armour's key spokesman, NBA star Stephen Curry, is having an off year. Nike's basketball sneaker market share continues to improve, suggests Konik.
3. Retro sneaker trend favors Nike and Adidas.
The number of retro stock-keeping units (SKUs) in the Top 60 footwear sellers was recently at a five-month high, points out Konik. Such a trend benefits Nike and Adidas due to their deep exposure. Unfortunately for Under Armour, it's not a major player in the retro scene, as it hasn't been making footwear for anywhere near as long as Nike and Adidas.
Jim Cramer and the AAP team hold a position in TJX Companies for their Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells TJX? Learn more now.