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Could these Sportswear Players Become Targets in 2012?

Bobby is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Sportswear makers, specifically Nike (NYSE: NKE) and Under Armour (NYSE: UA), have been outperforming the wider apparel and footwear sectors. Puma, Adidas, and Columbia Sportswear (NASDAQ: COLM) are also profiting from the positive momentum. Going forward, these companies will be benefitting from price declines in polyester and cotton, although they have to contend with higher labor costs in China, Thailand, Vietnam, and Brazil, as do other companies in the clothing and shoe sectors.

I expect advantageous valuations, improving performance, and positive cash positions of potential targets, as well as the intense competition in sports retailing in the U.S., to spur takeover and buyout activity in the sportswear sector.

One deal is already in the making. Private equity investor TPG Capital recently made an $820 million bid for Quiksilver rival Australian swimwear and surfing goods maker Billabong International. Billabong rejected the proposal and countered by announcing the sale of part of youth brand Nixon to cut debt and boost its performance. Nevertheless, it has left the door open for TPG to improve on its $3 per share offer or for another buyer to come forward.

I see the following five U.S. sportswear manufacturers or retailers as likely targets for private equity or for industry rivals.

As of December 31, 2010, Columbia Sportswear operated 41 outlet retail stores and eight branded retail stores in the U.S., 40 branded retail stores and 13 outlet retail stores in Japan and Korea; seven outlet retail stores and three branded retail stores in various locations in Western Europe; and two outlet retail stores in Canada. I believe that Columbia’s attractiveness lies in its excellent brand recognition and its increasing appeal to younger consumers thanks to its line of fishing-style sport shirts. Nike, with its $3.37 billion of cash, might be a potential buyer.

Columbia is a less likely target for VFC, which offers similar products under The North Face brand. Colombia currently has a market cap of $1.7 billion. Its forward P/E ratio is relatively high at 14.18 and so is its price to sales ratio of 0.98, which largely exceeds the 0.39 average for the textile/apparel clothing industry. However, its operating margin of 8.05% is better than the 6.88% industry average, and it has no debt.

Next, we have Hibbett Sports (NASDAQ: HIBB), which operates sporting goods stores in small to mid-sized markets primarily in the southeast, southwest, Mid-Atlantic, and the Midwest regions of the U.S. Its stores offer an assortment of athletic equipment, footwear, and apparel. The company also provides its merchandise directly to educational institutions and youth associations. Hibbett recently agreed for Dreams (DRJ) to become their exclusive online provider for team merchandise in the licensed sports category. As of April 30, 2011, HIBB operated a total of 799 retail stores comprised of 778 Hibbett Sports stores, 18 Sports Additions athletic shoe stores, and three Sports & Co. superstores in 26 states. HIBB could be a target for Dick's Sporting Goods (DKS), the largest listed U.S. sporting goods retailer with 437 stores.

Buying more stores would help Dick's to compete against privately held The Sports Authority, which has more than 450 stores across the U.S. Dick's has made no major acquisitions since 2007, when it paid $40 million for Chick's Sporting Goods and $225 million for Golf Galaxy. Hibbett’s market valuation is $1.28 billion. Its operating margin of 12.27% is well above the average of 4.05% for sporting goods stores. However, it is also more expensive, with a P/S of 1.83 compared to 0.82 for the industry, and a forward P/E ratio of 19.76. Hibbett has total cash of $53 million versus total debt of only $2.31 million.

Finish Line (NASDAQ: FINL) operates as a mall-based specialty retailer in the U.S. Its stores offer performance and athletic casual footwear, apparel, and accessories for men, women, and kids. As of September 22, 2011, it operated 646 stores in the U.S. The company also sells merchandise through its website finishline.com. Finish Line has a market cap of $1.21 billion and is debt-free.

According to my analysis, it might make a good private equity target. Its operating margin of 9.57% is below that of Hibbett Sports, but still above the 7.06% average for apparel stores. It has a price sales ratio of 0.95 and a forward price/earnings ratio of 13.12, the lowest of the five sportswear target companies.

Foot Locker operated 3,426 mostly mall-based stores in the U.S, Puerto Rico, the U.S. Virgin Islands, Guam, Canada, Europe, Australia, and New Zealand as of January 2011. It also provides franchise licenses to operate its stores in the Middle East and South Korea. The franchised network comprises about 26 stores.

Foot Locker has seen solid demand for its athletic footwear and could benefit from the kind of global footprint that Nike has. It seems to me that it would be a value-creating acquisition for Nike, as it would provide the market leader with new products for its global sales. Foot Locker has a market valuation of $4.31 billion and trades at 13.98x forward earnings. It has a price/sales ratio of 0.79. Its operating margin is 7.55% and it has more cash than debt.

Under Armour develops, markets, and distributes performance apparel, footwear, and accessories for men, women, and teenagers worldwide. It offers products made from moisture-wicking synthetic fabrics designed to regulate body temperature. UA has been rumored as a potential takeover target for Nike.

Similarly to Foot Locker, a merger with Nike would provide Under Armour with the international presence it is currently lacking. Under Armour has a market cap of $4.44 billion. I find it more expensive than Foot Locker with a forward P/E of 28.80 and a P/S of 2.89. But is also has a very attractive operating margin of 11.05%, even though it is still below Nike’s 13.12%. Like Foot Locker, Under Armour has more cash than debt.


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