Summary
Under Armour has been the darling athletic stock of this decade. The big question now is if they can keep the momentum rolling. Are they the real deal with a tremendous future, or have we seen the best of them? The article posted on the Motley Fool site paints a very positive picture. Is the premise for prosperity warranted? My analysis will focus on some of the key reasons I feel UA is at more risk than suggested by the writer of this article.
Analysis
I will address four major points made by the author as part of their reason for being so positive about the future of Under Armour. The supporting themes for future success are the company's current distribution, historic growth rate, the current P/E of the stock, and UA's current performance at retail.
The article starts by pointing out what a surprise it is to see the UA product in Broken Bow, OK, as if they did not expect distribution in their home town. I have been to Broken Bow. It is definitely not to be confused with some of the fashion meccas of the world. However, what Broken Bowians (if that is what they are called) do with their leisure is what a lot of midwesterners do: hunt and fish. It is, after all, the great outdoors, and there is a lot more of it versus what we find in NYC or LA. That one of the two largest outdoor retailers in the US (Bass Pro Shops) has a store in Broken Bow is not an accident. As a side note, the author also seems to be unaware the camo product offered by UA has been available for a couple of years. The demographics of the good ole boy hunter and the football crazed male fan in the midwest are very close, so camo flavored apparel and accessories work well together.
The growth rate is also brought into the picture: a very impressive 44% annual increase over the past five years. One cannot argue with the performance of the brand decade. With the help of Dick's Sporting Goods as a catalyst, the UA compression products flew out the door at an incredible velocity. The looser fitting workout apparel and UA accessories followed suit, and the American dream was being lived right before our eyes.
There have been some stubbed toes more recently along the way by UA. The footwear business has struggled after a very positive initial launch of football cleats. The subsequent launches of baseball, cross training, and running footwear neither created excitement nor boredom on average with the consumer, falling for the most part somewhere in between. That is not good for a hot brand.
The revenue gains reported in UA's most recent quarter are deceiving since they do not compare apples to apples. Revenue gains of almost $43M for the 1st Quarter of their fiscal year look solid on the surface. However, $40M of the $43M gain can be attributed to the launch of the new running shoe line, which did not exist the prior year. It also should be noted that two large distribution expansions, one into the mall athletic specialty retailer (FootLocker) and the other into their own retail stores (contributing a 37% increase in itself) also added to the sales gains, both of which mean that the existing UA retailers sold less product than the prior year.
The author states of the P/E multiple of nearly 30 as being "significantly lower than recent years". A true statement, but show me a company which does not have a significantly lower PE ratio after the carnage we have seen in the stock market over the past 6-8 months. Also of concern is the product shift which is now taking place. With more business shifting to footwear (basketball will be the next intro, and I think this category has much more potential because it fits closer to their core consumer than the running category), the margins will take a hit because footwear has much lower margins than apparel. True, the UA owned store margins will help to offset some of the footwear erosion, but there is not enough sales gains planned in this area to offset the footwear margins.
The last point I would like to touch upon is with the closing statement in the article:
"Apparel retailers have taken a hit over recent months, but Under Armour continues to perform."
Not true. The UA apparel business is down mid to high single digits for the quarter (estimates made necessary because UA conveniently decided not to disclose apparel figures), the international business went from being over 8% of the business last year to 4% this year (once again actual figures were not disclosed, but doing the math implies around a 60% decrease internationally), and this is considered performing?
I believe UA still has the ability to remain a solid athletic player in the market. Barring any catastrophic changes with the brand, UA should be able to maintain the niche it has carved out masterfully, and the potential exists for them to have some wins in the future.
However, just because the product is now in Broken Bow, OK, is hardly reason to proclaim that happy days are here again.
