An Overview Of Under Armour’s $53 Valuation

Under Armour (NYSE:UA), a manufacturer and distributor of performance apparel, footwear and accessories, has recorded high historical top line growth since its inception. During 2009-2012, its net revenues recorded a CAGR of nearly 30%. In 2012, its net revenues increased by 24.6% to reach $1.8 billion and its net margin also rose 40 basis points to reach 7%.

Under Armour aims to fuel its growth story by focusing on footwear and women’s products, expanding its international business and growing its direct-to-consumer channel. However, intense competition from bigger players such as Nike and Adidas, and Under’ Armour’s lack of ownership over patents of its fabrics, represent likely roadblocks to its future growth.

In this article, we evaluate the product categories of Under Armour, its main markets and the key strategies and risks that impact its valuation.

See our full analysis for Under Armour

What Are The Key Products Offered By Under Armour?

Under Armour’s product portfolio consists of apparel, footwear, and accessories. Accounting for over 75% of its revenue, apparel is the main product category for Under Armour. With its HeatGear, ColdGear and AllSeasonGear product lines, the company is positioned as the market leader in the performance apparel market. Apparel constitutes 74% of our price estimate for Under Armour.

Footwear is the second major product category for Under Armour and it accounted for 13% of the company’ revenues in 2012. Accessories (which include hats, bags, and baseball, football and golf gloves) accounted for 9% of the company’s revenues in 2012.

All the three product categories are witnessing high growth. Marking a 32% increase in its revenue, the footwear division witnessed the highest growth rate in 2012 followed by accessories (25%) and apparel (23%).

What Are The Major Geographical Regions For Under Armour And How Does It Sell Its Products?

Under Armour primarily sells its products in North America, which accounts for around 94% of the company’s sales. The remaining 6% of the revenue is derived from other international markets including Latin America, Asia, Europe, Middle East and Africa. Under Armour sells its products through wholesale channels, which include independent and specialty retailers, leagues and teams, department store chains, etc. as well as directly through company-owned stores and its e-commerce sites. The wholesale channel constitutes for just over 70% of Under Armour’s revenues.

What Are Under Armour’s Growth Strategies?

Focusing on women’s and footwear products, expanding international business, and growing its direct-to-consumer channel are the key growth strategies for Under Armour:

Focus on footwear and women’s categories

Under Armour is focusing on expanding its footwear segment to fuel growth in revenues. It plans to enhance its market share in the running and football shoe categories. In order to pursue growth within footwear, the company is launching innovative footwear technologies, bolstering its footwear distribution network and hiring new talent. We believe Under Armour will continue to provide differentiated footwear products, which will help it gain market share within the footwear market.

In addition, Under Armour is working towards enhancing the brand appeal of its women’s products. The company is enhancing the retail experience at its stores with a greater assortment of women’s products. Moreover, it is also increasing the distribution of women’s products through its indirect channel. We feel these initiatives will help Under Armour in gaining popularity among women consumers.

Expanding international operations

Considering its limited presence in international markets, Under Armour plans to expand its international operations rapidly. International net revenues recorded an annual increase of 21.1%, to reach $108 million, in 2012. Under Armour has tied up with international sporting leagues such as Tottenham Hotspur (an English soccer club) and opened stores in China to grow its international business. We believe there is significant potential for Under Armour’s products in international markets, and we expect revenues from these regions to continue increasing at a rapid pace.

Enhancing direct-to-consumer business

Enhancing the direct-to-consumer business is another growth strategy for Under Armour. It opened 21 factory stores in the US and bolstered its e-commerce business in 2012. Under Armour’s direct-to-consumer net revenues rose by 34% in 2012. These revenues accounted for 29% of the total net revenues in 2012, as compared to 21% in 2010. We expect retail business’ revenue contribution to increase over our forecast horizon. We believe that the direct-to-consumer business strategy will help the company in expanding its international presence and product portfolio.

What Are The Major Risks For The Company?

Intense competition from established players, such as Nike and Adidas represents one of the main threats to Under Armour. These companies have large resources at their disposal and hence can divert significant capital to R&D and marketing. If Under Armour fails to keep up with competition, it may not be able to grow its market share within the footwear and apparel market.

Under Armour is also significantly dependent on its two largest customers – Dick’s Sporting Goods and The Sports Authority. These two customers accounted for 26% of its net revenues in 2011. Since Under Armour has not entered into long term contracts with these companies, any loss of sales to these customers can directly impact Under Armour’s top line growth.

The main factor behind Under Armour’s growth has been its strong ability to keep innovating new products. However, Under Armour does not own patents for its fabrics and manufacturing technology, and these can be copied by its competitors. If Under Armour’s competitors start selling similar products at lower prices, then it could negatively impact the company’s growth in the future.

Our price estimate for Under Armour stands at $53, which represents a 5% premium to the market price.