Looking Under Under Armour
Board: Value Hounds
Under Armour is an impressively fast-growing sports wear company going toe to toe with the big boys in the industry. They are the David to a giant-like Nike.
Nike’s $65 billion market cap positively dwarfs Under Armour at $8 billion and Nike’s 2012 $25 billion in revenue is 14X Under Armour’s best year. But when it comes to off the chart growth, Under Armour is the hands down winner.
Long may you run
Under Armour makes clothing for hot weather, cold weather, all season and anything in between. The T-shirt design transcends loose fitting cotton tees and replaces them with a compression undershirt that stays dry by wicking moisture away rather than sponging it up. The apparel lines have expanded over the years and go well beyond T-shirts into hoodies, underwear, pants, leggings, tights, jackets and a veritable cornucopia of sport-specific clothing.
In 2006 Under Armour launched footwear and has been overhauling and expanding the line every year as they move along the learning curve. They sell football, baseball, lacrosse, softball and soccer cleats, performance training and running shoes, basketball footwear and hunting boots. It’s all designed to be light and breathable and of course provide moisture management—-their signature innovation.
Under Armour is tiny compared to Nike and is in the early part of it’s growth as a sports apparel force. In spite of being around nearly two decades, this could be just the beginning for them.
Apart from a dip below $10 in 2009, Under Armour has seen a sustained run in the share price since the IPO that went into hyper-drive in 2013 bringing it to historic highs and premium multiples.
An amazing sprint since the IPO
Founder and CEO Kevin Plank built a better T-shirt, tired of sweating through cotton T-shirts that were uncomfortably heavy and wet after a workout. He devised a compression T-shirt out of synthetic fabric that was lightweight and stayed dry. It was not a patented fabric or novel fiber, but simply a better engineered T-shirt. T-shirts worn under pads and uniforms become heavy and sweat-soaked and need constant changing --he knew he could do better. The result was a completely unique compression, tight-fitting T-shirt made from a wicking fabric that stays dry and lightweight.
By 2005, the company was ready to go public and the IPO was a smash -- the first IPO in five years to double the first day of trading. Shares opened at $31, more than double the IPO price of $13 and aside from a recession-induced slowdown from 2008-2009, it has never looked back.
There were 8.5 million shares offered and the proceeds went to pay debt, redeem preferred shares and general corporate purposes. There were no special dividends paid to insiders and no abuse of the proceeds. This is a strong indicator for management integrity from the beginning. The day before the IPO, Goldman Sachs the lead on the offering, saw Plank turn down a $750 million offer for the business that would have netted him $500 million at the tender age of 33. He loves his business and was in it for the long run.
The Nike shadow
Since the beginning, Nike has overshadowed the comparatively small Under Armour and loomed large for Kevin Plank, but the businesses are not as alike as they seem. Nike does present an impediment to Under Armour’s aspirations to expand into footwear with its broad retail presence. Nike is the big dog in shoes with 57% of its revenue coming from footwear sales and only 27% ($6.8 billion in 2012) from apparel. Under Armour is the reverse with 76% ($1.4 billion in 2012) of revenue from apparel and only 13% from footwear. Nike’s grip on footwear is impressive and they are 30% of global footwear sales. Under Armour has been trying to crack the footwear code since 2006 and is making strides but is no immediate threat
Under Armour’s newest shoe is a running “slipper” that can be made in fewer steps and completely retools the process. Instead of a shoe factory, it’s made seamlessly in a bra factory and is fused together without stitching and fits feet like a second skin. And weigh just six ounces. They have been under development for three years and if runners embrace them, Under Armour may finally “get” shoes. The technology and manufacturing is very cutting edge and worthy of Under Armour.
There are also the Spine running shoe platform entering its second year and Highlight cleats gaining market share in baseball and football.
Nike’s business is spread across North America, all of Europe, China, Japan and emerging markets with offices in 45 countries. North America is 41% of revenue and the rest of the world is nearly 50%. Under Armour has barely scratched the surface of international business and gets only 6% of its revenue outside of North America.
Two major catalysts for growth will be footwear and international growth as Under Armour makes the transition from local T-shirt start up to international athletic gear powerhouse. There is competition and it’s not just Nike. Adidas, Puma, Asics, New Balance and Fila are all after the athlete’s dollar and have a head start in both athletic shoe market share and the international market.
Under Armour’s hare to Nike’s tortoise
Nike’s growth has been a steady growth marathon and Under Armour a much faster sprint. If Plank can continue his charismatic pushing of Under Armour product into new market segments, growth for the company may be in its early stages. Plank is dynamic and driven and is positioning UA for future growth.
[See Post for Tables]
UA has been turning in impressive double-digit growth while Nike moves along in the high single-digits. Nike has never been a spectacular growth story with numbers anywhere close to UA. Over the past 16 years, it consistently grows revenue in the high single-digits. There were a few years in the 1990’s that saw revenue growth between 27%-42%, but that’s not the norm. Nike’s appeal is not dazzling spurts of high growth but measured sustainable and predictable performance year after year that inexorably expands its empire. Nike’s compounded annual growth is 9.9% since 1994. UA is interesting as growth story in sportswear if Plank can manage to extend the trend for years rather than quarters.
Just a decade ago, the US accounted for nearly 47% of revenue and the rest of the world was 39%. North America has declined to 41% and international now makes up 49%. International expansion has been a large part of Nike’s growth story. Under Armour has been a domestic growth story to date increasing revenue by nearly 9-fold since 2004. Of the $1.8 billion in 2012 revenue, international markets accounted for only $108.2 million of
Under Armour’s business.
Innovation is key to unlocking expansion
UA has an innovation center on the company’s campus in Baltimore. Around 30 people work in the department that brings cutting edge products to market from the revolutionary Speedform shoes to futuristic wearable technology like its heart and fitness monitor the Armour39. Under Armour is constantly tweaking, inventing and reinventing its products. The new marketing tactic to support innovations its athletic gear is called a Brand Holiday. Brand Holidays are a barrage of ads and athlete spokesmen promoting the newest shoes, apparel and tech heavily concentrated around specific dates and sports events. It may be too early to measure the success of the ads, but more are in the works with the Olympics and the soccer world cup fast approaching.
From the conference call
Our relentless flow of true innovation that works for all athletes is critical to our continued success. From a brand perspective, it's equally critical that we evolve our brand message as well. We started telling the UA innovation story with our first Brand Holiday earlier this year. The strategy behind these holidays is pretty simple: Cluster our marketing and communications at specific times of the year across all our platforms and drive our consumers into retail.
Under Armour sees the world
Kevin Plank is aware that the rest of the world needs more athletic gear and spent a great deal of time discussing the international expansion in the last CC:
…the significant opportunities to grow our Apparel business in North America provide a great foundation for the investments we are undertaking to make Under Armour a truly international athletic brand with Apparel and Footwear platforms being built to reach a global consumer. These investments in our Footwear and global infrastructure will cost money, but we are confident that the return on them will enable us to continue leveraging our brand equity as we expand into new categories and geographies.
This is the first time in their history that Plank feels he has the right products to take on the international competition and there is a lot of competition. Many of the big international brands are based in Europe or already have an extensive network of distribution and offices internationally:
• Puma-- Germany
• Adidas – Germany
• Fila based in US but originated in Italy
Nike is US based but European headquarter sare well established in the Netherlands with offices in 45 countries. A key part of Plank’s strategy is to get Under Armour on the ground and established as a “local” brand that can go toe to toe with Adidas, Puma and Nike on their international turf. Under Armour opened offices in the UK and will open offices in Germany and Australia.
Latin America is very much in Plank’s sights with the 2014 World Cup and the 2016 Olympics focusing the sports world’s attention on Brazil. They plan a launch of the brand in Brazil in 2014, anticipating heavy exposure and a chance for a Brand Holiday event. Latin America and Mexico will be a flurry of activity over the next three to four years.
The brand continues growing in Asia with a foothold in Japan. UA partners with Dome and wholesale revenue increased to $200 million with guidance for a 30% increase this year. Dome operates 24 Under Armour stores -- the Under Armour brand does translate across borders. Plank is predicting that international sales will account for 12% of the business by 2015 – double the 6% $108 million in revenue for 2012 to over $700 million.
Taxes provide a secondary reason for international growth. While Under Armour’s focus will be on a successful invasion and product ascendancy they are not forgetting that taxes will be favorably impacted by doing business outside the US with its high corporate tax rates. UA has spent time developing a sound international tax structure now in place that will generate higher profits as the global business expands.
Second quarter 2013
•Revenues increased 23% to $455 million.
•Apparel grew 23% to $310 million representing the 15th straight quarter of at least 20% growth.
•Direct-to-consumer revenues increased 29% --retail business opened 3 new Factory House stores increasing the domestic base to 105 from 92 Q2 2012.
•Footwear revenues increased 21% to $82 million and is now 18% of net revenues.
•International revenues increased 25% to $26 million and remains at 6% of total revenue.
•Gross margins expanded 2.4% to 48.3% as apparel and accessories costs declined and wholesale and Factory House low margin sales were a smaller percentage of sales.
•Diluted earnings per share increased to $0.16 compared to $0.06 last year.
Guidance for 2013
The initial guidance of $2.21 billion to $2.23 billion in revenue with 21% to 22% growth has been raised $2.23 billion-$2.25 billion and 22%-23% growth.
Operating income of $256 million- $258 million (growth of 23% to 24%) was increased to $258 million-$260 million and growth at 24%-25%.
There’s nothing not to like about UA except the price that has run up over double in the past few quarters. It’s always better to catch that first double and investment gets more high risk. Buying momentum stocks early in their life provides a margin of safety should the company fail to live up to expectations. Does valuation matter yet? Growth stocks can go through long periods of seemingly unstoppable growth and it’s never easy to decide where to get on and where to hold off.
Under Armour has these pluses:
1) Fast growth preferably above 29%
2) Charismatic driven CEO and management that manage the
It falls a little short on three other markers some of the fastest growing names have:
3) Perception the market is limitless
4) Dedicated fan base
5) Cutting edge technology
They are close on these. The footwear market and international sales while not without limits are a vast source of future growth.
The athletic wear technology is not new but it changes slightly year to year and Under Armour does get credit for developing and marketing the revolutionary compression T-shirts and other sweat wicking underwear.
Their presence on the web and in the media is not as pervasive as Netflix or Tesla but that’s a soft indicator and not key—just a marker of a stock the market loves and will bid up. It’s clear UA is getting its share of interest.
By nearly every ratio, UA is far pricier than Nike but you can argue it deserves the valuation because its growth is high and its opportunities for expansion seem almost limitless at present. Investors are pricing Under Armour as if footwear is guaranteed to take substantial market share and international growth will be as phenomenal as Kevin Plank is suggesting. It presents the classic momentum dilemma – buy the growth and take the plunge or wait for prices to come back to earth and miss the run entirely.