Corporate Finance Review Project Nike vs. Under Armour The questions refer to the attached information for Under Armour and Nike, as well as the attached BusinessWeek article on the performance-enhancing sports apparel market. Read the questions carefully and make sure that you respond to them completely (50+ words) using full sentences. All ratio calculations MUST be rounded to 2 decimals (for example: 1.23). You may type or hand write your responses to the questions on SEPARATE SHEETS OF PAPER. You may work together, but you MUST turn in your own original work. Questions 1. Competitive Markets. How competitive is the performance-enhancing sports apparel market? Who was the pioneer in this market? What advantages do you think this company had as the first company in the market? Who are some of the other competitors in this market currently? What are the advantages of this competition to BOTH consumers and businesses? 2. Sources & Uses of Cash. Under Armour (UA) and Nike (NKE), like most companies, have many sources and uses of cash. Provide some examples of possible sources of cash (cash receipts) these companies use to operate and grow their businesses. Both are structured as corporations – how does this help their access to cash? Provide some examples of possible uses of cash (cash payments); which of these are variable costs and which are fixed costs? 3. Financial Statements. Explain (in your own words) what type of information can be found in the income statements for these companies. What about the balance sheets? What information would you be most interested in analyzing if you were a bank (be specific)? What about if you were an investor? What additional information might you find about these companies in their annual reports? 4. Interest. Under Armour has total debt of $77,724. If the interest rate on this debt was 4%, what would be the amount of simple interest for one year? How does this compare to the actual interest expense for the year (see the company’s income statement)? Is the actual interest rate they pay on their debt higher or lower than 4%? Calculate the Times Interest Earned ratio for UA. What does this ratio tell you (in your own words)? 5. Liquidity. Calculate the Current Ratio for both UA and NKE. Explain how this ratio is calculated and what it means. Based on your calculations, which company has a more favorable ratio? Calculate the Working Capital for both companies and explain what this tells you. How is working capital similar to the current ratio? Who is likely to be interested in this information? Why? 6. Inventory Management. Calculate the Inventory Turnover Ratio for both UA and NKE. What does this tell you about how well the companies manage their inventories? Which one is better at it? Give examples of items that might be considered (a) direct materials, (b) work in process, and (c) finished goods for these companies. 7. Profitability. The primary goal of all businesses is to make a profit … so, how are UA and NKE doing? Choose two of the Profitability Ratios that we have discussed and calculate these ratios for both UA and NKE. Which of these companies performs better based on your calculations? Explain what the ratios mean (in your own words). UA has had earnings growing much faster than NKE. Why do you think that is? 8. Market Performance. Using the information provided, calculate the EPS and P/E Ratio for both companies. What does EPS mean to a shareholder? Based on the P/E Ratios that you calculated, which stock is relatively more “expensive”? Explain how you can tell. What might be some of the reasons for this (hint: think about the relative size and profitability of the companies and how fast they are growing)? 9. Investing in UA and NKE. Based on all of the information provided, which company’s stock (Under Armour or Nike) is likely to be a safer investment? Why (justify your decision)? Which one is likely to have a higher return? Why (again, give reasons)? If you wanted to receive some sort of income from your investments each quarter, which one would be the best investment? Why? According to the information shown, which stock has performed better in the past year (explain how you know)? 10. Capital Projects. What are two examples of capital projects that Under Armour might undertake in the next year? What are some likely sources of capital to finance these projects? What would be a possible acquisition that Nike could make that would represent horizontal integration? What about an example of vertical integration for Nike? UNDER ARMOUR, INC. designs, NIKE, INC., a consumer products company, develops, markets & distributes performance engages in the design, development, and marketing apparel, footwear, and accessories for men, of footwear, apparel, equipment, and accessory women, and youth primarily in the US and Canada. products worldwide. The company's footwear It offers products made from moisture-wicking synthetic fabrics, which products include running, training, basketball, soccer, sport-inspired are designed to keep perspiration away from the skin, and regulate body urban shoes, and children's shoes. It also markets shoes designed for temperature regardless of weather conditions. The company's products tennis, golf, baseball, football, lacrosse, walking, skateboarding, cycling, extend across the sporting goods, outdoor, and active lifestyle markets. volleyball, wrestling, aquatic activities, and other athletic uses. The Under Armour provides its products in three fit types: compression (tight company sells sports apparel and accessories, athletic bags, and fitting), fitted (athletic cut), and loose (relaxed). Its footwear products accessory items, as well as offers apparel for licensed college and include performance cleats primarily for use in football, baseball, and professional team and league logos. It also sells a line of performance softball. The company also offers baseball batting, football, golf, and equipment under the NIKE brand name, including bags, socks, sport running gloves; and bags, socks, headwear, eyewear, and watches that balls, eyewear, timepieces, electronic devices, bats, gloves, protective are designed to be used and worn before, during, and after competition. equipment, and other equipment designed for sports activities. In Under Armour also offers various products for off-field outdoor sports, addition, it manufactures and distributes ice skates, blades, protective including hunting, fishing, running, mountain sports, skiing, and golf. gear, hockey sticks, licensed and team apparel, and accessories. STOCK INFORMATION STOCK INFORMATION Stock Symbol: UA (NYSE) Stock Symbol: NKE (NYSE) Recent Stock Price: $94.31 Recent Stock Price: $111.22 52-Week Stock Price Range: $52.62-$99.10 52-Week Stock Price Range: $69.43-$111.78 Total Shares Outstanding (in thousands): 50,300 Total Shares Outstanding (in thousands): 484,400 Dividend & Yield: N/A (NA) Dividend & Yield: $1.44 (1.30%) Earnings Growth Rate: 25% per year Earnings Growth Rate:10% per year INCOME STATEMENT INCOME STATEMENT (in thousands) (in thousands) Total Revenues 1,472,684 Total Revenues 20,862,000 Cost of Revenues 759,848 Cost of Revenues 11,354,000 Gross Profit 712,836 Gross Profit 9,508,000 Operating Expenses 550,069 Operating Expenses 6,693,000 Operating Income 162,767 Operating Income 2,815,000 Other Income 158,639 Other Income 33,000 Interest Expense 3,841 Interest Expense 27,846 Income Tax Expense 59,943 Income Tax Expense 679,154 Net Income 96,919 Net Income 2,133,000 BALANCE SHEET BALANCE SHEET (in thousands) (in thousands) ASSETS ASSETS Current Assets Current Assets Cash and Cash Equivalents 175,384 Cash and Cash Equivalents 4,538,000 Accounts Receivable 150,227 Accounts Receivable 3,450,000 Inventory 324,409 Inventory 2,715,000 Other Current Assets 39,643 Other Current Assets 594,000 Total Current Assets 689,663 Total Current Assets 11,297,000 Property, Plant, and Equip. 159,135 Property, Plant, and Equip. 2,115,000 Other Assets 70,412 Other Assets 1,586,000 Total Assets 919,210 Total Assets 14,998,000 LIABILITIES LIABILITIES Current Liabilities Current Liabilities Accounts Payable 176,725 Accounts Payable 3,571,000 Short-Term Debt* 6,882 Short-Term Debt* 387,000 Total Current Liabilities 183,607 Total Current Liabilities 3,958,000 Long-Term Debt* 70,842 Long-Term Debt* 276,000 Other Liabilities 28,329 Other Liabilities 921,000 Total Liabilities 282,778 Total Liabilities 5,155,000 STOCKHOLDERS’ EQUITY STOCKHOLDERS’ EQUITY Total Stockholders’ Equity 636,432 Total Stockholders’ Equity 9,843,000 Do These Clothes Help You Work Out? The performance-enhancing sports apparel market is sizzling The makers of snug-fitting sports apparel are turning up the marketing volume on new garments designed to improve muscle strength, aid circulation, and deliver other benefits. Some of the claims fall short of medical proof, but the movement is having one clear effect: putting pressure on Under Armour, which pioneered the trend. Adidas and Wacoal, a Japanese supplier of women's underwear, are promoting garments with built-in bands to add muscular support. Speedo and TYR Sport have new swimsuits designed to help swimmers zip through the water. Nike will soon show off a new line of body-hugging tights. And Australian upstart Skins will begin a U.S. marketing campaign claiming its clothes hasten muscle recovery after extreme exertion. "This is such a hot category," says Skins CEO Jaimie Fuller. "Everybody is leaping in." For months, the new entrants have been chipping away at Under Armour's lead. It now has a 35% share of a U.S. sportswear niche worth $3 billion, according to researchers Sports One Source, down from 40% a few years ago. Although sales keep soaring, profit margins have slipped. As newcomers battle Under Armour in a softening economy, they're pushing advances in technology but straining credulity with their performance claims.