Founded in 1996, Under Armour Inc. (NYSE: UA) has quickly become a major player in the sports apparel and footwear industry. With a growing presence on all seven continents, the company has gained significant market share over the last decade. Under Armour has endorsement deals with top athletes including Tom Brady (NFL MVP), Stephen Curry (NBA MVP), Carey Price (NHL MVP) and Clayton Kershaw (MLB MVP). Under Armour is one of only two companies in the S&P 500 that has reported 22 consecutive quarters with over 20% year-over-year growth in revenue. Under Armour’s annual revenue has grown from $17,000 in 1996 to $3.08 billion in 2014.
Under Armour reported 3Q15 financial results for the three months ended September 30, 2015. The company had net revenues of $1.20 billion, up about 28% from $937.9 million in 3Q14. Net revenue growth was led by a 23% increase in apparel revenue from increased sales of its base-layer and storm innovation platforms, and a 22% increase in accessories’ revenue from new product launches in the bag category. The footwear segment grew 61% over the past year with revenue up from $122 million in 3Q14 to $196 million in 3Q15 – on growing popularity of the company’s basketball, running and training shoes. The company reported a solid 17% rise in operating income from $146.1 million in 3Q14 (with a net margin of 16% of revenue) to $171.4 million in 3Q15 (though margins dropped to 14% of revenue). For 3Q15, Under Armour reported net income of $100.5 million, or $0.45 per share, up 13% year-over-year.
In 3Q15, Under Armour beat analyst estimates on revenue by 3% and on EPS by 2%, marking another successful quarter. For the nine months ended September 30, 2015, net revenues were up 28% year-over-year, hinting at strong FY2015 performance which is also reflected in management’s updated guidance.
Under Armour management updated full-year 2015 guidance, increasing revenue estimates by 2% from $3.84 billion to $3.91 billion – this represents top line growth of about 27% from $3.08 billion in FY2014. Operating income is estimated to be $408 million for the full year, near the high-end of management’s previous operating income guidance of $405 to $408 million.
Under Armour shares ended the week (11/27/2015) at $89.68, up 32% year-to-date and near the middle of the company’s 52-week range of $63.77 – $105.89. Shares trade with a price-to-earnings ratio of 93x on earnings of $0.97 per share. Brean Capital initiated coverage on Under Armour with a Buy rating and a price target of $117 (30% upside) while FBR Capital maintained an Outperform rating with a $115 price target (28% upside). Shares are down 6.3% over the past three months on profit taking and fears over weak holiday sales, but could rise nicely if Under Armour reports higher than expected sales over the Black Friday and year-end holiday shopping season.
Under Armour continues to aggressively expand its alliances and marketing deals. The company has teamed up with the University of Wisconsin (UW) on an endorsement deal that is worth approximately $96 million. The deal goes into effect July 1, 2016, and gives the University roughly $10 million a year in cash and sports apparel through 2026. Under Armour will provide all apparel and footwear for all 23 NCAA sports for the Badgers, UW’s college football team. With this endorsement, Under Armour replaces UW’s previous deal with Adidas AG (ADDYY), knocking out a major competitor at this college account.
Additionally, Under Armour extended its endorsement deal with Auburn University to provide apparel and footwear for all 21 NCAA sports for the Auburn Tigers through June 2025. Auburn was the first university to sign a deal with Under Armour. The original endorsement deal in 2006 was worth approximately $4.35 million.
Under Armour recently announced a new partnership with WWE superstar and famed actor Dwayne ‘The Rock’ Johnson, which will likely be leveraged with the company’s connected fitness application segment. Under Armour and HTC are expected to launch their fitness tracker, the HTC Grip, in 1Q16. This should grow the company’s app base of 150 million registered users and allow for a seamless introduction into connected devices, smartwear apparel and food & nutrition markets.
Under Armour also extended its endorsement partnership with NBA superstar Stephen Curry through 2024, with the launch of the “Steph Curry Two” sneaker. Under Armour also entered into a multiyear partnership with the NBA for apparel at the NBA Draft Combine, giving the company early access to rookies for shoe deals.
Under Armour management is focused on long-term profitability despite investor concern over current spending and increased debt. Total liabilities increased from $724 million to $1.5 billion and “net cash used for investing activities” was up 621%. Under Armour capital expenditures are well above all of its peers; capex averaged 3.5% of sales from 2010 to 2015 and is expected to increase to 8% – 10% of sales through 2018. This increased spending is tied to gaining market share and has pushed down gross margins to 48.5% over the trailing twelve months; even so, gross margins are ahead of competitors such as Nike Inc. (KNE) at 46.2%, Columbia Sportswear Co. (COLM) at 45.9% and Adidas at 47.5%.
Through various business development initiatives, management plans to double revenue to about $7.5 billion by 2018, with a strong emphasis on expanding the brand globally. To push revenue growth over the next 3 years, Under Armour aims to establish 2,000 shop-in-shops and grow to 800 stores. Management predicts that 18% of net revenues will come from international markets by 2018, up from 11% in 3Q15.
Under Armour shares have suffered from price volatility over the last six months but analysts are bullish on the stock given the upward trajectory of revenue and earnings. Under Armour has a market capitalization of about $20 billion, well below Nike at $114 billion, but its strong upward momentum should result in revenue and book value expansion over the long run. With a mean price target of $107 and a high price target of $130 (upside of 19% and 45% respectively), Under Armour shares should bounce back from their current slump and deliver solid capital gains over the coming years, as the company grows its global brand.