Under Armour Can Flex Various Muscles For Growth

Under Armour (NYSE:UA), a developer and distributor of athletic apparel, footwear and accessories, held its Investor Day conference on June 5, 2013. The company expressed aims to double its revenue from about $2.2 billion (estimated) in 2013 to about $4 billion in 2016. This translates into a CAGR growth of 22% in top line over 2013-2016. In addition, it targets increasing its operating income from around $257 million (estimated) in 2013 to around $480 million in 2016, representing a CAGR of 23% during the period.

The company believes it is still scratching the surface of its various growth drivers including the women’s, international, direct-to-consumer, youth and footwear business. Growth in these categories is expected to outpace the overall company’s growth over the next three years. A strong focus on innovation will continue to remain the pillar for Under Armour’s growth with recent innovations like Charged Cotton, STORM, Infrared expected to drive demand during the next few years.

The men’s category while an established business for Under Armour is expected to continue its healthy double-digit growth rate in the future. To achieve growth within this segment, the company will focus on establishing itself as a leading training brand and expand into new categories and sports, such as running, golf, underwear and outerwear.

See our full analysis for Under Armour

Here’s a brief update on the various growth drivers of Under Armour’s business: –

International is the biggest growth opportunity for Under Armour

International expansion represents the biggest growth opportunity for Under Armour as it currently derives only around 6% of its revenues from markets outside the U.S. In comparison, Nike records 58% of its revenues from markets outside North America. Under Armour will focus on regions including Asia (China, Korea and Japan), Europe (U.K., France and Germany), Australia and Latin America (Brazil, Mexico, Argentina and Chile) to expand its international business. In the near future, it will open subsidiaries in countries including Australia, Mexico, Brazil and Chile. It will also leverage international sporting events in Brazil such as 2014 FIFA world cup and 2016 Olympics to drive its future sales. The company aims to increase the proportion of international sales in total revenues to 12% by 2016.

Sales growth in women’s business will outpace men’s business

The growth in women’s business represents another huge opportunity for Under Armour as it historically been more popular for its men’s products. Owing to higher expected growth rate in women’s apparel as compared to men’s apparel, the share of women’s products of total apparel is expected to grow from 27% in 2010 to 33% in 2016. ^[1]

Under Armour aims to compete in all footwear categories

Under Armour is focused on driving innovation within the footwear category to enhance its appeal as a full head-to-toe brand. It aims to gain market share in all the footwear categories. While the company has seen high growth in its football and baseball categories over the past few years, it will be focusing on basketball and running footwear in the future to drive its footwear sales. Owing to these efforts, the proportion of footwear sales in overall net revenues is expected to rise from 13% (estimated) in 2013 to 15% in 2016.

Youth business also has tremendous upside

Under Armour considers the youth business important for its future growth, both from a product opportunity perspective and also to build future loyalty for its brand. To achieve growth, the company will focus on girls’ products and specific innovation stories within this segment such as the Alter Ego product line, which gained high traction among this customer segment. While girls’ products are estimated to account for 20% of the youth business in 2013, the company expects to triple this business by 2016. ^[2] The share of youth business in overall net revenues is forecast to increase from 10% (estimated) in 2013 to 12% in 2016.

Direct-to-consumer channel will see expansion in the future

Expanding the direct-to-consumer channel is another long term goal for Under Armour. Rather than opening new stores, the company will focus on expanding its existing stores over the next few years to expand this channel. It aims to double the total square footage of its Factory house stores from 500,000 square feet in early 2013 to more than 1 million by 2016.

Further, the company will focus on the e-commerce channel to enhance the share of e-commerce sales in total sales, which stands at around 9% today. The share of direct-to-consumer channel in total sales is estimated to rise from 29% (estimated) in 2013 to 31% in 2016. Since direct-to-consumer sales have higher gross margins as compared to wholesales sales, we expect this trend to favorably impact the company’s gross margins in the future.

We are in the process of revising our $53.50 price estimate for Under Armour’s stock.

1. Under Armour’s CEO Hosts Investor Day Meeting (Transcript), Seeking Alpha, June 5, 2013 [↩]
2.  Under Armour’s CEO Hosts Investor Day Meeting (Transcript), Seeking Alpha, June 5, 2013 [↩]