SUMMARY
Sports apparel upstart Under Armour has been racing ahead of its competitors in recent years.
The business possesses strong pricing power and a reputable brand among teenagers and young adults.
As it expands into international markets and develop new product lines, the company will remain consistent in growing its revenue and profits.
The stock price has been crushed lately and this should give savvy investors an opportunity to be part of a growing brand for years to come.
1. Introduction
When I was in junior college, I stumbled upon a sports magazine in my school library while waiting for the next class (No, I wasn’t the kind of student who made use of free time to revise). On the cover page of “SLAM” magazine was young rookie, Brandon Jennings, who was featured for scoring a career-high 55 points in a single game. But more than that, he was promoting a company that I would invest in 4 years later. That company is Under Armour (NYSE: UA).
[Source: chicagotribune.com]
I have been observing this sports apparel upstart since the beginning of 2013 but couldn’t find it reasonable to invest in the company because the valuation was too lofty. Big mistake.
Ever since, the company has more than doubled in value before I pulled the trigger in 2014. This investment in an overvalued company by any metric has proven to be a good one. Being an avid student of businesses, I wasn’t one who would walk away from a mistake.
Why did I fail to buy to company that has a decent financial track record, strong pricing power and a great brand amongst its loyal and growing customer base? Let’s take a look at the business to see why making an investment today can still take you to the championship game.
2. Business Overview
Over the last few years, Under Armour has grown from a young start-up to become a famous household name alongside brands like Nike and Adidas. The business is primarily known as manufacturer and distributor of performance apparel and, increasingly, footwear (thanks in large part to NBA MVP Stephen Curry). The company sells its products across the world with a large portion (87%) of sales coming from North America. Under Armour has generated more than $4 billion in sales over the past year and it has not shown signs of stopping.
Here are some of the company’s financial highlights:
[Source: morningstar.com]
Over the past three years, Under Armour is the only consumer brand in the top 10 fastest-growing companies in the S&P 500, with total revenue increasing 116% through 2015. Still, the market expressed its displeasure with the company this quarter after it announced that the growth rate will likely slow to 22% year-over-year in the coming years. This should be seen as a buying opportunity for patient shareholders who can accept a solid double-digit growth.
[Source: Author]
Over the last four years, Under Armour’s return on invested capital has far outstripped its weighted average cost of capital. This means that the company is utilising both shareholder’s equity and long-term borrowings in an efficient way that would create value over time.
3. Why Should You Invest?
A Fast-Growing Business with Expansion in International Markets
During the latest quarter, the company brought in $1.02 billion of sales from its apparel segment which accounts for 69% of its total revenue. Footwear sales, which now makes up 22.3% of sales, increased by 42% to $278.9 million. The company’s international revenue also soared by 73.7% to $226.2 million. It accounts for less than 20% of the total sales and the management is laser-focused on growing it. Lastly, Connected Fitness revenue showed huge improvements as it reached $20.2 million.
The management will likely continue to invest meaningfully in its footwear business while developing its talent and infrastructure to help improve its profitability as the business scales. Investors should keep an eye on the company’s development in China as it will likely be a critical market for expansion. For example, sales from China during the quarter makes up half of the company’s international revenue.
A Foothold in Connected Fitness
CEO Kevin Plank has always been a visionary and over the years, he has quietly been guiding the company to bridge the gap between apparel and technology.
In 2013, Under Armour announced the acquisition of MapMyFitness, a fitness technology company that operates an app-based global digital fitness community. In early 2015, Under Armour acquired Endomondo and MyFitnessPal. These three apps boasted 120 million users worldwide and Under Armour spent $710 million total on the acquisitions.
Under Armour has been betting on a “connected fitness” revolution made up of digital platforms that enable users to track and observe their fitness and health data. For instance, MyFitnessPal offers resources for healthy living and nutrition, including calorie counters and nutrition and exercise tracking. As the world becomes increasingly connected, Under Armour will stand to benefit from the shift in the way data in fitness is consumed.
Visionary Leader in Kevin Plank
If there is one ingredient that would differentiate a great company from a good one, it would be the quality of the leadership. Plank founded his company in the 1996, when he was working from his grandmother’s basement. A former University of Maryland football player, Plank has huge ambitions about this company; to build the world’s largest athletic brand. With a seed capital of $17,000, he has now grown the brand to be worth more than $13 billion. I believe that shareholders will continue to be rewarded as he takes the company to the next level.
4. Potential Risks
Competition From Larger Players
I would almost always disagree with the simplistic and flawed assumption winner-take-all view of business competition. Hence, I believe that Nike and Under Armour are able to co-exist within its industry. However, competition from larger players will always be Under Armour’s biggest challenge and the largest player around is Nike. If the upstart ever loses its way in the competition, investors will be much better off trading it away while looking for high performance somewhere else.
Key-Man Risk
Due to my partnership philosophy in investing, key-man risk is one that has tendency to surface. The stock has been split into class A and C shares so that Plank is able to cement his control over the company. If Plank decides to leave the company or settle for second-best, I think it would be best that investors look for other investments.
Investment Plans Backfire
While the company’s operating cash flow has been positive, free cash flow is not. Under Armour has been spending a ton of cash on its advertising and sponsoring efforts with the hopes that it will pay off eventually. This can be seen as a risky strategy as it is difficult to measure the success of such investments. Prolonged negative free cash flow can hurt the company’s finances if it would need to raise money again. Investors should keep an eye on this metric for some time as the company continues its reinvestment trajectory.
5. Conclusion
Under Armour and Brandon Jennings had 1 thing in common back in 2010; both had lots of attitude and raw talent but not much big-game experience. Fast forward 6 years now, Under Armour has grown from an underdog to competitor who is full of energy, ambitious and ready to take on bigger and stronger rivals. Couple that with a visionary leader at the helm, there is no telling how far this company can run.
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Marcus Ho
Research Analyst, Mind Kinesis Value Investing Academy
Disclaimer: Please note that all information stated in this article is just for education purpose only and should not be used as any form of recommendation or advice.