Pat McKeough recently replied to an Inner Circlemember looking for an opinion on Under Armour Inc.—a rival to Nike and Adidas. While the company’s gearing up for a busy fall season, the stock’s high price poses a risk, says Pat.
Q: Pat: Can I have your recommendation on the brand basketball player Steph Curry wears, Under Armour? Thanks.
A:UNDER ARMOUR INC. (symbol UA on New York; www.underarmour.com) designs and markets athletic clothing, shoes and accessories for men, women and children. It outsources its manufacturing to suppliers in China, Vietnam, Indonesia and other countries.
Under Armour mainly sells its gear through general retailers, sporting goods stores, company-owned outlets and online. Clothing supplies 62% of its revenue, followed by footwear (25%) and accessories (9%). The remaining 4% is divided equally between Connected Fitness, its digital health and fitness community, and by licensing its brands to other companies.
Most of Under Armour’s products use fabrics that wick away sweat from the skin. That makes them more comfortable and reduces their weight.
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Thanks to these features, the company has deals to supply uniforms and other products to several professional sports leagues, including Major League Baseball, the National Football League and the National Basketball Association, as well as soccer teams in Europe and South America.
In the second quarter, ended June 30, 2016, Under Armour’s sales rose 27.7%, to $1.0 billion from $783.6 million a year earlier. Footwear sales increased 58% to $243 million (led by the Curry basketball line) and apparel sales rose 19% to $613 million. Accessories revenue rose 21% to $101 million.
International sales (15% of total revenue) expanded 68%, and North American sales (85%) rose 22%.
In the quarter, Under Armour made a big push to expand its own network of stores in time for its busiest sales period—the second half of the year. As of June 30, 2016, the company had a total of 40 Brand House stores—larger locations with a greater selection of Under Armour product.
Its more reasonably priced Factory House stores finished the quarter with a total of 172 outlets. Most of the new stores are outside of North America.
Growth Stocks: Sports Authority closure cuts earnings $0.03 a share
The company earned $6.3 million, or $0.01 a share, in the latest quarter. That’s down from $14.8 million, or $0.03 a share, a year earlier; it was also below the consensus estimate of $0.03. However, the bankruptcy liquidation of its biggest retail partner—the Sports Authority—cut its earnings by $0.03 a share.
Under Armour’s long-term debt of $838.1 million is a low 5.0% of its market cap. It holds cash of $121.2 million, or $0.28 a share.
The company’s strong brand and international growth potential add appeal. Rising interest in fitness, particularly among baby boomers, is also fueling Under Armour’s growth.
The company’s purchase of MyFitnessPal in early 2015 has also helped to strengthen its outlook. Under Armour purchased the business for $475 million in order to develop its online community, Connected Fitness. It now has over 175 million users and adds about 100,000 new members every day. The company doesn’t charge users to download health and fitness apps. Instead, it aims to use data it collects from them to increase sales through customized offers for clothing and other products.
Under Armour faces strong competition from larger firms such as Nike and Adidas, which also make sweat-resistant clothing. Moreover, the stock trades at a very high 70 times the $0.56 a share the company will likely earn in 2016. That increases the risk of a sudden drop, especially if the crucial last half of the year fails to meet sales expectations. Lower earnings could encourage large numbers of momentum traders to dump the stock.
Inner Circle recommendation: HOLD only for aggressive investors.
I think that Under Armour’s strategy to open more retail stores outside the U.S. makes sense. It should be interesting to see if it pays off as intended as the company makes up for the loss of Sports Authority. I am hoping that TSI will revisit this stock in the next few months to a year. Thanks.
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I think that Under Armour’s strategy to open more retail stores outside the U.S. makes sense. It should be interesting to see if it pays off as intended as the company makes up for the loss of Sports Authority. I am hoping that TSI will revisit this stock in the next few months to a year. Thanks.
I see Nike has stopped making golf clubs in order to focus on shirts and shoes. Could be a sign of more competition for UnderArmour.