Under Armour: Key Changes To Our $66 Price Estimate
Under Armour (NYSE:UA), a developer and distributor of athletic apparel, footwear and accessories, is positioned well for long term growth. It has registered over 20% top line growth for the last 13 quarters. We believe the company will continue this momentum in the future as it is still scratching the surface of its various growth drivers, including its women’s, international, direct-to-consumer and footwear businesses.
In this article, we outline the key reasons underlying our $66 price estimate for Under Armour. We encourage our readers to modify these estimates to see the impact on the company’s valuation.
See our full analysis for Under Armour
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Strong Growth In Top-Line Expected
|
Year |
2012 | 2013E | 2014E | 2015E | 2016E | 2017E | 2018E | 2019E | 2020E |
|
Total Revenue ($ millions) |
1,835 |
2,222 | 2,695 | 3,273 | 3,977 | 4,800 | 5,747 | 6,860 |
8,176 |
| Annual Growth | 25% | 21% | 21% | 21% | 22% | 21% | 20% | 19% |
19% |
In an investor day conference held recently, UA’s management forecast revenue to reach $4 billion by 2016. We expect a robust growth rate in Under Armour’s top line over our entire forecast period driven by its various growth drivers:
- Growth in international sales represents one of the key drivers for Under Armour’s business. The company is aggressively focusing on its business growth in international markets such as Asia (China, Korea and Japan), Europe (U.K., France and Germany), Australia and Latin America (Brazil, Mexico, Argentina and Chile). We believe Under Armour’s international sales growth rate will exceed the overall revenue growth rate in the future.
- Growth in the women’s business is another opportunity being aggressively tapped by Under Armour. The company is introducing innovative offerings in this market, which should fuel its growth.
- The footwear business is another crucial driver as UA aims to gain market share in all the footwear categories. Its highlight baseball and football cleats, Spine running platform and a new SpeedForm technology will boost sales in this business.
- The youth business presents another upside opportunity, and the company intends to grow this business at a rate above the overall revenue growth.
- Finally, Under Armour will continue to expand its direct-to-consumer business as well as the wholesale business to provide additional product offerings and leverage its strong product demand.
Gross Margin Is Expected To Expand In The Future
|
Year |
2012 | 2013E | 2014E | 2015E | 2016E | 2017E | 2018E | 2019E | 2020E |
| Gross Margin | 47.9% | 48.3% | 48.6% | 48.9% | 49.3% | 49.6% | 50.0% | 50.4% |
50.9% |
We expect Under Armour’s gross margin to rise in the future driven by the following key drivers:
- Expansion of direct-to-consumer business will help the company achieve higher gross margin.
- We expect supply chain efficiencies in the future which will also positively impact gross margin.
- A rising proportion of footwear to overall sales will have a negative impact on overall gross margin as footwear sales currently contribute a lower gross margin.
- Growing international business could dilute the gross margin as the company has engaged several distributor channels in international markets. However, we expect the international gross margins to improve in the future once Under Armour opens more subsidiaries in international markets.
Selling, General And Administrative Expenses As A Percentage Revenue Could Moderately Increase
|
Year |
2012 | 2013E | 2014E | 2015E | 2016E | 2017E | 2018E | 2019E | 2020E |
| SG&A Expenses As % of Revenue | 31.9% | 31.6% | 31.6% | 31.6% | 31.7% | 31.8% | 31.9% | 32.0% |
32.0% |
While the absolute amount of SG&A expenses will rapidly increase in the future, we expect these expenses as a percentage of revenue to moderately rise over our forecast horizon. This estimate is based on the following:
- We think the marketing expenses will grow at comparable rates to overall revenue growth.
- Selling expenses will follow the growth trends in the direct-to-consumer business and hence this could grow above the overall revenue growth.
- Product innovation and supply chain costs could rise at a higher rate as compared to the overall revenue growth as Under Armour will continue to focus on launching innovative products in the market.
- Corporate expenses could grow at a lower pace as compared to the overall revenue growth as we expect efficiency to drive savings in this expense category.
Capital Expenditure Is Expected To Remain High
|
Year |
2012 | 2013E | 2014E | 2015E | 2016E | 2017E | 2018E | 2019E |
2020E |
| CapEx As % of Revenues | 2.8% | 3.7% | 3.7% | 3.7% | 3.7% | 3.7% | 3.7% | 3.7% |
3.6% |
Our capex estimates are based on the company guidance and our understanding that Under Armour should continue high investments for business growth. Under Armour’s management forecasts capex of around $85 million in 2013 and $150 million in 2016.
Effective Tax Rate Forecast
|
Year |
2012 | 2013E | 2014E | 2015E | 2016E | 2017E | 2018E | 2019E | 2020E |
| Effective Tax Rate | 36.7% | 40.0% | 39.1% | 38.2% | 37.8% | 37.4% | 37.0% | 37.0% |
37.0% |
Our effective tax rate forecast is based on historical trend as well as the company guidance.
Our $66 price estimate for Under Armour is approximately 5% below the current market price. We believe that the market price already incorporates most of the drivers present in the company’s stock.