Armoured For Growth; Potential Opportunities For Under Armour

Baltimore-based Under Armour (NYSE:UA) is a manufacturer of moisture-wicking fabrics, which are specially designed to wear in every climate. The synthetic performance apparel division has been the biggest driver of revenue growth for the company. The division currently contributes nearly three-fourths to the company’s top line.

Furthermore, the division’s revenues have grown at a rate higher than 20% for 16 straight fiscal quarters. ^[1] Through continuous innovation in its product portfolio, the company has been able to drive the average selling price of performance apparel higher and retain its margins.

The synthetic performance apparel market is estimated to be around $3 billion, of which Under Armour holds about 70% of the share. Since the company does not have much scope to gain share in this market, its growth depends on how fast the overall market grows. Our current price estimate for Under Armour has priced in a high annual growth rate of ~20% for this market till the end of our forecast period. However, if the actual growth rate were to trail our estimates, there could be a significant downside to our current valuation. In case the market grows at an annual rate of ~15% instead of our 20% forecast, there could be a 15% downside to our $74.20 price estimate for Under Armour

See our full analysis for Under Armour

Keeping this in mind, we look at some other segments from which the company’s growth could come from:

Footwear

Under Armour has a strong presence in the apparel section of many sporting goods stores but is under-represented in shoe sections. Since its launch, the company has been able to grab 2.7% and 2.1% of the running shoes and footwear markets respectively. The footwear market is a highly segmented space and Under Armour can leverage the brand loyalty it has generated from its performance apparel customers to increase its share in these markets. It aims to grow its revenues in the footwear division from $290 million currently to ~$600 million by 2016.

However, there are some caveats here for the company. Gross margins in footwear are 30% lower than in other categories. So far, the company has only been able to sell shoes at lower prices. Future plans to rollout shoes in medium and in high price ranges will therefore require careful brand positioning. Under Armour also aims to make inroads into the basketball shoes segment and has recruited several NBA stars to endorse its products.

Focus On Women And Youth Business

The women’s business has outpaced the overall growth of the company. Currently, it contributes about 30% to the net revenues, up 18% from eight years ago. The company is confident that the women’s business has the potential to overshadow the men’s business and has plans to expand its presence in this market. To achieve this, the company has launched new marketing initiatives specially targeted at women. ^[2]

Starting this year, Under Armour began creating three marketing campaigns for the “holidays” in February, July and November. The month-long marketing campaigns are designed to highlight a particular technology or product Under Armour wants to promote, and the February 2014 marketing drive will be the first campaign dedicated to women’s merchandise.  In addition, the company is remodeling its stores and launching new stores at locations where women are known to shop. ^[3]

The company feels the youth section is also underserved. The section, which currently contributes around $220 million to the company’s revenues, is expected by the company to grow more than 100% to $470 million by 2016. Sales numbers to this demographic are being driven by apparel sales, but strong momentum was also visible in footwear sales. ^[4] These numbers show that the company is making strong connections with its youth customer base, which bodes well for its future.

International Expansion

International revenues right now only amount to 6% of Under Armour’s net revenues. The company plans to grow these revenues by expanding internationally. In a presentation on Investor Day, the company’s management revealed that it expects the contribution of international sales to grow to 12% by 2016.

Through increased eCommerce sales, higher store counts, elevated average selling prices and increases in “shops within shops” (a concept throughout Dick’s Sporting Goods stores), the company can expect its other divisions (i.e. footwear and accessories) to grow significantly. As distribution centers are built and inventory is able to flow better through various channels, cost reduction will also play a big part in the company’s profitability in the future.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Under Armour Earnings Call Transcript [↩]
2. How Under Armour plans to grow its women’s business [↩]
3. Under Armour’s Feminine Side [↩]
4. Under Armour Investor Day Presentation [↩]