How Important Is Asia To Under Armour’s Stock?

Under Armour’s (NYSE: UA) success over the years has been driven primarily by the company’s business outside North America. Although North America is Under Armour’s biggest segment, growth in this region has slowed down in the last couple of years due to the restructuring plan undertaken by the management. Asia has led the company’s growth story over the previous few years. Asia has not only accounted for a bulk of the company’s growth over the last few years but has also been the largest manufacturer of Under Armour’s goods. Trefis highlights the importance of its Asia business for Under Armour in an interactive dashboard. Additionally, you can modify any of our key drivers to gauge the impact changes would have on Under Armour’s valuation in a separate dashboard.

#1. Asia’s Contribution To Under Armour’s Revenue Has Steadily Increased Over The Years

• Asia has been the company’s fastest-growing segment since 2015, adding well over $490 million to total revenues at an average annual rate of 45%.
• This growth can be attributed to robust growth in the company’s apparel as well as footwear business.
• China has been the largest growth driver accounting for the bulk of the growth in this region.
• The segment grew by 14% year-over-year in 2019, contributing nearly $78 million to total incremental revenues.
• The growth was driven by sales growth in direct to consumer and wholesale channels.
• Moreover, the company’s brick-and-mortar business also flourished, particularly in China, thanks to strong product offerings.
• However, the company’s sales in the region are likely to take a significant hit in Q1 2020 due to the coronavirus outbreak.
• Nevertheless, Under Armour Asia will continue to drive the company’s growth in the coming years.

#2. Asia’s Revenue Growth Has Comfortably Outpaced Under Armour’s Total Revenue Growth

• Under Armour has added $1.3 billion to total revenue since 2015, at an average annual rate of 7.4%.
• On the other hand, Asia alone added $491 million to Under Armour’s total revenue at an average annual rate of 45%.
• While the segment only contributes 12% of the company’s total revenues, it accounted for nearly 40% of the company’s incremental revenue growth over 2015-2019.

#3. Notably, the growth of Under Armour’s competitors in Asia has been lower, ranging from -18% to 15%

Data around the revenue growth of competitors Gap, Tapestry, and Ralph Lauren is available in our interactive dashboard.

#4. Asia Segment Has Also Been Operating At A Higher Margin

• Asia segment’s five-year average operating margin was 20.2% – almost 4.5x Under Armour’s total operating margin of 4.7%.
• The stark difference in the margin can be attributed to the fact that the region has witnessed higher sales in the company’s higher-margin direct-to-consumer channel.
• Moreover, the company’s Latin America segment has not turned profitable yet.
• Overall, operating margin for both Asia and Under Amour has declined over the years as a result of the impairment charges resulting from restructuring plans undertaken by the company to focus its financial resources on key growth markets.

#5. Finally, Asia-Pacific Region Manufactures A Bulk Of Under Armour’s Products

• Asia is also Under Armour’s manufacturing hub, with the region manufacturing most of the company’s goods.
• Notably, the company manufactured 58% of its apparel & accessories and nearly 87% of its footwear products in Asia in 2018.

To sum things up, Asia is not only the company’s fastest-growing segment but also the company’s manufacturing hub. Asia has been the company’s largest growth driver and is expected to remain so. With Under Amour’s largest region, North America, struggling, Asia remains key to Under Armour’s growth prospects in the coming years. Moreover, the continued development of the Asian middle class and the rise of per-capita income will further aid the company’s growth in the region.

Starting with our forecast for Under Armour’s revenues as detailed above, we estimate the company’s adjusted EPS for full-year 2020 is to be around $0.13. Using this figure with our estimated forward P/E ratio of 130x, this works out to a price estimate of $17 for Under Armour’s stock, which is roughly 10% ahead of the current market price.

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