Key Drivers For Under Armour’s $53 Valuation

Apparel retailer Under Armour (NYSE:UA) is a growth company which has registered a CAGR of 26% in its top line during the period 2008-2012. Revenue from all its product segments, apparel, footwear and accessories, rose sharply by 23%, 32% and 25% respectively in 2012. Moreover, its operating margin increased by 30 basis points in 2012 to reach 11.4%.

We believe Under Armour will continue to record rapid sales growth over the coming years as it leverages its strategy of expanding the footwear and women’s business. The company has less than 1% market share in the footwear market, and we feel this figure will grow in the future as Under Armour expands its product line and launches innovative products. In addition, expansion in international markets represents a key growth driver for Under Armour, considering the growth opportunity in markets such as Asia and Latin America. We also believe that the company’s focus on direct-to-consumer business could augur well for its gross margins in the long run.

While Under Amour is poised to grow strongly in the future, the market valuation already reflects the enthusiasm. Our price estimate for Under Armour stands at $53, which is almost in line with the current market price. In this article, we discuss the key catalysts for Under Armour’s business and why we think the company could witness rapid sales growth over the coming years.

See our full analysis for Under Armour

Expanding Footwear Business

Expanding its footwear business is one of the key goals for Under Armour. According to the company, the addressable footwear market is valued at $26.4 billion, of which Under Armour accounts for around 0.9% market share, with more than $238 million in footwear sales. ^[1]. It plans to bolster its market share in several shoe categories, including running and basketball. The company is making efforts in this direction by launching innovative footwear technologies, enhancing its footwear distribution network, hiring new talent and expanding marketing efforts.

Footwear revenues grew by 32% in 2012, and we believe this segment will continue to grow rapidly in the future. In 2013, Under Armour will expand its ‘Spine line’ of footwear products and high top cleats as part of its efforts to grow the footwear business.

Focusing On Women’s Business

Being popular for its men’s products, Under Armour is now focusing on women’s products to fuel its growth. The women’s business accounted for $400 million in revenues, as compared to the total revenues of $1.8 billion in 2012. ^[2] The company is making efforts to change its brand image among female customers by re-aligning the retail experience at its stores to cater to women customers. At its recently opened specialty store in Baltimore, it has adopted different mix of styles and colors to resonate with them. In addition, it is growing its floor space at key distributors such as Macy’s and Dillard’s, with a greater variety of women’s products.

Recently, Under Armour signed an 8-year deal with USA Gymnastics to be its official gear provider. ^[3] This deal is further expected to enhance its brand image among women customers. According to the NPD group, the women’s athletic apparel category in the U.S. is around 10% greater than the men’s category. ^[4]

We believe these initiatives will increase Under Armour’s popularity among women customers and will help fuel its future growth.

Growing International Business

We believe its expansion in international operations represents one of the key growth drivers for Under Armour. While international sales currently account for only 6% of the total revenue, we think the company is still under-penetrated in the international markets, as larger companies such as Nike derive 58% of its revenues from markets outside North America. Since Under Amour has been able to successfully gain market share against stronger competitors such as Nike and Adidas in the U.S. market, we feel it can replicate its success in international markets too. International sales grew by 21% annually in 2012, and we believe it will continue to grow at a strong pace in the future.

Under Armour has taken steps to enhance its international operations by partnering with popular international sporting leagues such as Tottenham Hotspur (an English football club) and opening stores in China.

Focusing On Direct-to Consumer Business

Under Armour is also bolstering its direct-to-consumer business by opening more company-owned stores and e-commerce sites. It opened 21 factory stores in the U.S. in 2012. Under Armour’s direct-to-consumer net revenues grew by 34% in 2012 and accounted for 29% of the total net revenues, as compared to 21% in 2010. Since direct-to-consumer sales have a higher gross margin than wholesale sales, we believe the increasing retail business’ revenue contribution will help improve Under Armour’s gross margins in the long run. Moreover, increased focus on direct-to-consumer will also help the company in expanding its international operations and product portfolio.

1. Under Armour poised for greater growth with new products, The Baltimore Sun, May 01, 2012 [↩]
2. Under Armour bids to win over more women, San Francisco Chronicle, February 22 2013 [↩]
3. Under Armour teams with USA gymnastics team, The Baltimore Sun, February 28, 2013 [↩]
4. Under Armour Finds Feminine Side to Go Beyond $2 Billion, Bloomberg News, February 15, 2013 [↩]