Coverage Launch: $53 Trefis Price Estimate For Under Armour

Under Armour (NYSE: UA) is a manufacturer of performance apparel, footwear, and accessories. The company’s apparel products are made of moisture wicking fabric and is segmented into three main gearlines based on weather: HEATGEAR (for hot weather), COLDGEAR (for cold weather), and ALLSEASONGEAR (for mild weather). Each of these gearlines is further split into three fit types: compression (tight fit), fitted (athletic fit), and loose (relaxed). The company started manufacturing and distributing footwear in 2006 and is the official footwear supplier to the NFL. In 2011, the company bought back its license and started manufacturing and distribution accessories (gloves, hats, etc.) in house.

The company was founded in 1996 by Kevin Plank after growing tired of sweat soaked T-shirts while working out. The company sales are primarily derived in the US with North America consisting of 94% of sales in 2011. However, the company has been focused on expanding internationally and recently signed a deal to provide training and playing gear to Tottenham Hotspur of the English Premier League. The company’s distribution channel has primarily been wholesale with about 70% of sales coming from this channel in 2011. The company’s major customers in this segment are Dick’s Sporting Goods and Sport Authority, which make up 26% of sales. The company has been focused increasing its direct channel footprint by increasing the number of stores in the US.

See our full analysis for Under Armour

We have broken down our analysis of Under Armour into four main business segments:

1. Performance Apparel ~75% of value
2. Footwear ~14%
3. Accessories ~8%
4. Licensing ~2%

We believe Under Armour is well positioned to benefit from the growing trend towards healthier and more active lifestyles. Investors have been attracted to this growth potential and have been willing to pay a high multiple for the company’s shares.

Furthermore, the company has a healthy balance sheet with adequate cash and minimal debt. Of course when considering investing a growth company there are many risks that investors should consider before investing. One key risk is the state of the economy. Given the discretionary nature of the products that UA sells, a slowdown in the economic picture can have a meaningful impact on their business. We highlight the positive and negative drivers for UA in our evaluation of the company.

Divisions Breakdown

In the Apparel segment, Under Armour offers a variety of styles and fits to provide comfort, regulate body temperature and improve performance. The retailer offers three main gears such as HOTGEAR, COLDGEAR, and ALLSEASONGEAR. This segment contributes about 75% to the retailer’s revenues.

Under Armour started offering footwear in 2006 and has been expanding its product categories since. The footwear offerings include football, baseball, lacrosse, softball, soccer cleats, performance training footwear, running footwear, basketball footwear and hunting boots. They are designed to enhance comfort and performance. Footwear accounts for 12% of Under Armour’s revenues.

Under Armour started selling accessories such as bags and hats recently in 2011. Previously these products were under its licensing business. This segment also includes baseball, football and golf gloves. These accessories incorporate HOTGEAR and COLDGEAR technologies and moisture-wicking fabrics. Accessories contribute about 9% to the revenues.

According to our estimates, performance apparel, footwear and accessories constitute 75%, 15% and 7% of the company’s value. The remaining is taken up by the licensing business.

Geographic Split – Domestic/International

Under Armour sells its products in the North American and international markets. The international markets include certain countries in Europe, a licensee partner in Japan, and distribution channels in some other countries. Under Armour opened its first store in China in 2011. The retailer is also selling its products to European soccer and rugby teams.

In North America, Under Armour operates through the wholesale and retail channel. The retail segment also includes Under Armour’s direct-to-consumer business. In this region, Under Armour is the official footwear supplier to the National Football league and it also partnered with NBA in 2011.

Looking at the revenue contribution, the North American operations contribute about 94% of the revenues and the international business, about 6%.  Under Armour generated about $1.4 billion revenues in 2011.

Business Structure Split- Retail/Wholesale/Licensing

The retail channel of Under Armour (which also includes the direct-to-consumer business) comprises of its specialty stores and factory house stores. At the end of calendar year 2011, the retailer operated around 80 factory houses and 5 specialty stores. The retail channel constitutes about 27% of the total revenues.

In the wholesale segment, Under Armour offers its apparel, accessories and footwear through more than 25,000 stores worldwide. A majority of these are in North America. This is the most important channel for Under Armour as the revenue contribution is around 70%.

Through the licensing business, Under Armour generates 3% of its revenues. The retailer enters into contracts with licensee partners. Under these contracts, licensees are permitted to manufacture and distribute Under Armour’s brands for a fee. Thus, we regarded it as a 100% gross profit margin business, as it does not have any costs associated with it.

Our price estimate for Under Armour stands at $53, which is roughly inline with the market price.

You can see our complete analysis for Under Armour here.