Under Armour, Inc. (UA)

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Moving into athletic shoes to take on Nike. Great clothes, hugh profit margin, and all I see on the kids in the leagues that my children participate in is UA clothes. None of these kids are wearing Nike or Addidas anymore. You know brand loyalty, hit the young ones and let them buy your stuff for life. I like this company long term.

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UA invades Germany.

Hey UA - you are my worst performer that I'm still hanging onto. I stood by you during that questionable decision to buy the SuperBowl ad slot. I've held my breath at your struggles with inventory. Why? Because everybody I know from the teenager to the 70 year old cyclist really likes your stuff. Now figure out how to make some money.

Under Armour, Inc.
Under Armour operates in the incredibly competitive athletic wear market. Their revenues are derived primarily from their apparel sales, with lesser contribution from their younger footwear, accessories and licensing businesses. UA’s primary apparel sales are in wicking products that are marketed under HEATGEAR TM and COLDGEAR TM designations (although they have lots more, as specified in their Intellectual Property rights section of the 10K).
Under Armour has an aggressive sports marketing program that focuses on collegiate and professional level athletic partnerships. For example, it is common for them to supply entire teams with their gear. From their 2007 10K: “We implement this strategy through professional and collegiate sponsorships, individual athlete agreements and by selling our products directly to team equipment managers and to individual athletes.”

Interesting Information:
The company was started by Kevin Plank in 1996 who played football at the University of Maryland and is headquartered in my home town of Baltimore MD. Kevin is the CEO and chairman. He is a sprightly 36 yrs old. Legend has it, that Kevin got tired of continually changing his cotton shirts during football practice and conceived of the idea for Under Armour during his college tour.
Kevin owns about 14 million shares and his brother J. Scott Plank owns about 3.4 million shares (about 29% and 7% of outstanding shares, respectively).

The Bear Case:
Probably the biggest negative on the stock is its current valuation. Currently (March 7, 2008) it trades a hefty 32X current earnings ($1.05/sh). Analysts give it a relatively high 5 yr growth rate of 25%. This puts the PEG at 1.28.
In addition to valuations, UA’s got a couple a couple of headwinds against it:
• Possible recession could reduce customer’s desire to spend on a “premium” athletic product
• Current year inventory increased dramatically (it doubled) – which could indicate heavy markdowns coming up. This would pressure margins if they are incorrect in the inventory assumptions.
• According to their most recent discussions, they are reducing marketing spend.
• There is a large short interest – 42% of float
• Currently the company is closely tied with collegiate and professional football – season over…

The Bull Case:
This is growthier fare than I normally engage in… but I still find it very compelling. The valuation is high, but a 1.28 PEG is not overly excessive for a company projected to grow 25% for five years. Normally I’m a big DCF fan for valuation – but for the most part UA is plowing all its available cash back into the business. So in this case , I settled for an earnings growth model. At $1.05/share currently, I used growth rates from 15% per year to 25% per year for 10 yrs to get a sense of the value. This gives me a range of $34 to $79 per share. I think the 25% rate might be too aggressive – the sweet spot is probably 20% which gives us a current value of $52. So at $34.40, conservatively we have a price that either represents full value, or is selling up to 50% off. Or somewhere in between – nice and exact – like all valuation exercises. Additionally, I love the fact that the growth is self funding and they have negligible debt.
Another point in UA’s favor is how vested the young founder is in the company. With a majority voting interest and almost 30% of the shares outstanding his interests should be well aligned with shareholders. Additionally, according to the May 2007 proxy, he makes a reasonable (for CEOs) $500K/year with a reasonable bonus potential. Kevin and the entire management team, are not given buckets of stock options, so they should not be overly incented for short term performance at the expense of long term performance.
The shorts may be right, but I suspect if they are it will be a short term phenomenon only. One of the most concerning statistics is the increase in inventory reported on the last annual report – from the latest 10K: “…primarily due to our planned strategy for additional core inventory needed to support the anticipated consumer demand for our products” Now, inventory management is an art and a science. I certainly hope they’ve got this one right and the sales increase is fueled by the additional inventory. This could also be a direct result of the launch of their new trainers (shoes).
I also think the marketing program that Under Armour has is a competitive strength. The combination of grass roots, athlete endorsed marketing, coupled with slick traditional media makes for a powerful strategy.
Finally, a little more anecdotally, I like UA positioning (and all athletic apparel merchants) as a portion of their customer’s wallets. It’s well documented that women control the majority of discretionary spending in the US, particularly on apparel (hey, don’t blame me, its documented… somewhere). But athletic apparel is one area where men and women can co-exist in a happy retail wonderland. In fact, for some men, a sparkly new pair of trainers is likely to be the only type of fashion statement they ever make…

Final Thoughts
Normally, I don’t chase companies with valuations this high. But I’ve followed several in the past with great prospects, good management and compelling products – hoping someday that they would be “cheap enough” for me to buy in. Only to see them forever float away. Well, I think UA is cheap enough to start nibbling on. The shorts may be right and it may go lower on recession, or inventory concerns. But those are bumps all growing companies are going to have to deal with and I think this one has what it takes to overcome them in the long haul. In the meantime, lower prices should allow us to average down on our entry price.

Disclosure: I own shares of Under Armour

As an unWise man once said:

Klicken-klatschen -- wir kommen -- kannst du es hoeren?

Just wait until the International Football (soccer) community gets ahold of the product. It has a lot to offer to cold and warm climates. UA is here to stay and only has just begun. Teenage athletes are ready for a new NIKE, ADDIDAS etc. The exposure from the Pros all the way down to pee wee leagues is incredible. Did I mention the quality of the product. This is a woulda, coulda, shoulda 4-6 years from now. UA is the real deal. As an outdoorsman and former athlete I can hardly sleep at night thinking about where UA is going.... There will be some trudging for a while.

klicken-klatschen -- wir kommen -- kannst du es hoeren?

Unterreustung Deutschland

Fussball ist hier!!!

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Ok this baby is too high. P/E is crazy and the company is moving into areas with lower profit margins.
SO WHAT!
Cramer said it was high at $30 but he liked it. This company is not a fad, they have just signed some big name NCAA football teams to wear their gear (Auburn, Miami). High school kids want this stuff and the parents will shell out the cash. UA sponsorships are actually being used as recruiting tools by colleges. You know where these kids end up after 4 years of college football? Yeah thats right, the NFL. UA is chasing money streams right now trying to capitalize on their brand. This is not another CROX. They are doing things the right way. They are easing into the shoe market cleats first. They are unique in that they are moving from apparel to shoes, not the other way around. Management is young and innovative, not to mention the CEO is only 33 years old.

Some experts have mentioned concerns that UA doesn't own a patent for the material it uses. Well I submit to you this: Try walking in Dick's sporting goods and buying some generic UA shirts. Speaking of DKS - this might be a safer way to play UA for you old fogies.

1. My three kids play travel sports. They and everyone else they play with wear UnderArmour in cold weather. Period.

2. At my health club, UA is everywhere, especially on men and boys under 30. And few things are more appealing than a well-built man in UnderArmour. It not only works, it looks good and makes its wearers look good too.

3. UA is becoming so accepted as the standard for cold weather protection, it is becoming the generic term for it-i.e., "it's going to be cold - wear your UA under your uniform."

Granted UA's PE is high for their industry avg, it doesn't mean that this stock isn't good buy at the current levels. This stock is a definite LT buy if UA can keep their margins low, because expect demand and sales to only aggressively increase over the next few years. Go to any gym, more than half the people there are wearing something UA...and now with kids in sports it's becoming a trend item to have (not to mention extremely comfortable in general).

These guys have been brilliant marketers so far, have lots of room to expand, but the valuation is too high.

New thing on the block but don't worry the other t-shirt companies will come out with a better and cheaper product. I wear the t-shirt and it feels just like the Sears brand Eagle comfort.
The direction will be up but soon DOWN.

Dominance at Sporting Goods retailers like Dick's, and branching out into footwear beyond cleated (basketball, running and training) are natural fits for the brand. Although great execution will be the determinant, I expect UA to continue it's success.

UnderArmour rules! Although not as well advertised at the Olympics as I would have thought, they are burrowing into the American landscape. Great growth that continues, and the company is always innovating and finding new stuff for consumers to buy--like shoes. As a runner, I find myself buying more and more UnderArmour products. And now I own the stock, thank you.

Under Armour is in the business of developing, marketing and distributing branded performance apparel, footwear and accessories for men, women and youth. The company, through its technologically advanced method, fabricates products that could be worn in nearly every climate. The company’s products are sold through retail stores across the United States, Canada, Japan and the United Kingdom through large national and regional chains of retailers, as well as smaller, independent and specialty retailers.

The $19 billion US market for active sports apparel is highly competitive and includes many new entrants as well as well established players like Nike and Adidas. The company, through its differentiating strategy and selective distribution policies has been able to withstand this competition, which is clearly seen from the fact that the company has been able to double its revenue over the past two years. Moreover, the company’s gross margin has been on a rise, touching 50% for the fiscal 2006, while net income has almost doubled for the same period.

The management anticipates that through its innovative products and concentration on core products it would be able to enter new markets, which will help to achieve its 2007 revenue guidance of around $560-$580 million, an increase of 30%-35%. Further, to support this revenue growth the company will raise its trade spends. Moreover, company’s sourcing initiatives coupled with sales mix shift towards higher margin products would further strengthen their margins. The ever-increasing demand for Under Armour products and company’s intention to expand internationally should make the stock a good deal.

I think Under Armour is going to be the Pit Bull of sports apparel. With it's great "protect this house" campaign and it's supply deal with the NFL, it reeks of testosterone. It will become very popular globally once we start seeing their name on the field. Of course, the numbers look great and they have a product that is more than just a name. Their moisture-wicking material is a great product for many ourdoor activities.

Pitch:

This is a strong company with a great core product and a great brand name. The problem is that current valuations are too high - approximately $55 per share, PEG > 2.0, P/E > 60. Growth prospects are high, but a number of risks exist.

Risks:

Increased competition - Nike and other competitors have developed Under Armour-style products which will hurt sales.

Increased marketing costs - This is necessary for UA to boost and maintain sales and the brand name. Management recently noted increased marketing costs - look for this trend to continue.

Squeezed - Today's upgrade shot the stock up over 12%, which undoubtedly startled anybody associated with the 35% short float. Currently may be over-bought.

Opportunities:

Expanded Product Line - UA can apply its core product technology to new products (ie athletic footwear). However, footwear is the main arena for Nike. They may be able to compete, but growth may not be as great due to existing presence of competitors.

International Growth - The majority of UA's sales are domestic, and management is working on promoting UA in Europe via rugby. However, Nike's international presence may be a tough moat to cross.

In conclusion, at current levels it seems that all opportunities have been priced in and risks have been relatively ignored.