by Jason Jenkins, Investment U Research
Tuesday, December 18, 2012
Some of the articles I write stem from a personal need to inform and/or educate. After all, there’s a lot of deception and doublespeak out there.
And if you watch television or read the news, you can see pundits and analysts use all these “hip” and “sexy” catch phrases to make it seem like they’re insiders – like they know more than you.
I like to strain through all that verbiage and give you in layman terms what’s really going on, and how you can profit from it.
But sometimes my writing is based on curiosity. I see things and think to myself, “What’s going on here?” I recently experienced one of these moments while watching ESPN over the Thanksgiving holiday last month.
While watching all the games, SportsCenter highlights and commercials, I realized how much I saw the Under Armour (NYSE: UA) brand on everything. It brought me back to around the year 2000, when I was playing in a men’s football league and it was cold outside. A friend gave me a black long-sleeve shirt and said it would keep me warm even when sweating. And it did. I didn’t recognize the symbol on the shirt at that time, but now a good part of the world does.
Fast forward 14 years. From my house in downtown Baltimore, I can see the Under Armour headquarters. So it got me thinking, is this brand barrage just “smoke and mirrors” advertising, or does this company’s makeup really support the brand’s unbelievable growth?
My research shows that Under Armour is for real.
Revenue is Growing
Here’s what initially got my attention late this summer. The second quarter of 2012, revenue at Under Armour increased 27% – to $369 million – over the prior-year quarter. Net income was also up 7% from last year. Earnings per share (EPS) showed a 6% increase at $0.06.
One of the main reasons for the increase in growth was due to UA’s footwear segment.
Revenue from footwear increased 44% from first quarter to second quarter 2012. The segment accounted for 18% of all revenues for the second quarter.
And presently, the company is on a roll. Overall, UA has strung together 10 consecutive quarters of more than 20% top-line growth. Management has also forecast revenue and operating income growth in the neighborhood of 20% to 25% next year.
Showing No Signs of Slowing
Here are a few factors that should be considered in UA’s future growth potential.
Domestic Retail Expansion
Under Armour’s retail presence used to be pretty limited to places like Dick’s Sporting Goods (NYSE: DKS). However, one of its major points of emphasis has been to grow its direct-to-consumer business. This aspect currently accounts for 24% of UA’s total sales.
The goal is to now expand its retail presence by means of more factory stores here in the United States. The company now has 75 outlets, and analysts expect them to add 20 to 25 stores each year. This should translate into about a 20% to 25% jump in retail revenue.
Market Share Gains in Domestic Sports Apparel
This is a total market of around $50 billion. In nine years, Under Armour’s piece of the market went from 0.6% to nearly 3%. Over that same amount of time, Nike (NYSE: NKE) has plateaued at about 7% of the market.
Expect Under Armour to increase its part of this pie for the following reasons:
- It is very likely that their brand recognition will increase domestically in the near future. We can look at last year’s partnerships to see this taking shape. UA became the official performance footwear supplier of Major League Baseball and struck a deal with the National Basketball Association so that NBA players could market UA jerseys and footwear.
- UA will continue to set itself apart by innovation. Last year, the company introduced “Charged Cotton,” which aids to accelerate evaporation of moisture.
- Under Armour has decided to venture into new apparel segments. It’s kind of picked a fight with yoga-apparel provider Lululemon Athletica (Nasdaq: LULU). UA introduced its own line of yoga apparel called “UA Studio.” It’s Kevin Plank’s attempt to enter a niche market where hopefully they could create a “one-stop shop” for everyone in the family – from yoga to weekend warrior to kids’ recreational equipment.
- And as I discussed before, don’t forget about footwear. In the six years since it was launched, footwear has grown to be 12% of UA’s sales. Under Armour believes that the footwear market is $26.4 billion – and it only accounts for $200 million in sales.
The international market is huge. Just ask Nike. They get 60% of their sales from overseas. Comparatively, Under Armour is in its global infancy. Only 6% of sales stem from other markets not located on this continent.
A step in the right direction is Under Armour’s new partnership with Barclays English Premier League’s Tottenham Hotspur to be their official outfitter. The Premier League is coming up on a television deal worth £3 billion as of 2013 to 2014 where games will be broadcast in 212 territories to 643 million homes. That’s a lot of free marketing.
The Bottom Line
When you put all of this information together, it doesn’t look like Under Armour will be slowing down anytime soon. If you look at its track record, in about a decade, Under Armour evolved from being a niche player in apparel to a major player with its hand in everything.
There are a few analysts in the market who are a bit weary of UA’s current price-earnings valuation, but most – myself included – believe that Under Armour’s future will definitely put those doubts to rest.
JasonUnder Armour (NYSE: UA): Hype You Should Actually Believe In,