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UA AT A GLANCE

P/E ► 25.9 AVG EV/EBITDA ► 11.8 AVG ROA ► 8.6% AVG ROE ► 11.4% AVG Debt to Equity ► 0.367 LOW Current Ratio ► 3.64 AVG Interest Coverage Ratio ► 27.8 AVG

 

 

 

 

 

 

Under Armour is a sportswear company that has built a leading brand name in the emerging market for hi-tech athletic gear ^[1]. The company uses patented synthetic fabrics in its apparel, marketing its products as perfomance-enhancing alternatives to traditional cotton or mesh gear as UA products are designed to wisk away moisture, regulate body temperature, and improve comfort. Under Armour's brand has captured share in the hard-to-reach demographic of 18-35 sports-oriented males, and established itself in the youth market as well. UA has been traded as a public company from November 2005. ^[2]

The company's traditional focus has been on compression (tight fitting) performance attire, but the company has also begun to offer a more comprehensive array of products-- “LooseGear” in an effort to appeal to customers looking for a more conventional relaxed-fitting apparel that still provides exceptional performance ^[3]. In 2006, the company also unveiled its first line of cleated footwear products and was able to capture 20% of the market for football cleats that year ^[4]. As Under Armour has expanded its retail offerings, the company has also seen rapid financial growth. Revenue has grown from $50 million in 2002 to $725.24 million in 2008.^{[5] [6]}. In the fourth quarter of 2009, revenue increased to $222.2 million, up 24% from $179.3 million in the same quarter of 2008, while operating income grew 17.8% to $26.9 million.^[7] Under Armour's revenue increase was mostly driven by a 26% increase in sales in its apparel segment.^[7] For the fiscal year ending in 2009, net revenue grew 18.1% from 2008 to $856.4 million, an increase from the Company's previously provided outlook of $830-$835 million.^[8]

Company Overview

Increases in UA's revenue over the last five years is due more to an increase in popularity of hi-tech gear rather than Under Armour capturing market share from competitors. Yet the increasing gap between revenue and net income is due to Under Armour's attempts to break into new markets as well as its reliance on third party distributors. Under Armour is spending more on merchandising to break new markets as well as dealing with distributors.

Business Segments

Under Armour's apparel products are separated into three different categories, ColdGear, HeatGear, AllSeasonGear. ^[9] In 2006 Under Armour added a fourth segment, footwear, entering this market with their performance cleats for football, baseball, and softball. The company quickly signed a contract with the NFL the same year to be their official footwear supplier^[10] , and in 2008 footwear brought in roughly $84.8 million, over twice that of 2007, when it brought in $40.8 million in sales. million.^[11] Under Armour also produces a number of accessories such as gloves for football, baseball, and golf, as well as socks, bags, and eye wear. ^[12] Revenue from accessories increased to $31.5 million from $29.1 million in 2007.^[13]

HEATGEAR: Designed for hotter temperatures and humid environments, HEATGEAR is the original Under Armour product. Its microfiber design helps the body breath and gets rid of moisture quickly, allowing the athlete to remain light and dry. ^[14]

COLDGEAR: COLDGEAR is the most expensive product line of Under Armour and the most popular. Its design is similar to the HEATGEAR, with microfiber material getting rid of moisture. However it is also designed to trap heat and keep the body warm. Its popularity helped to Under Armour's profits increase dramatically in late 2007 and earl 2008. In 2007, Q2 (the spring season) revenue was $124 million^[15], whereas in Q4 (the fall season) Under Armour took in $186 million^[16]

ALLSEASONGEAR: This product line is designed differently from other Under Armour products as it does not use microfiber. Rather it uses technical fabrics that are good for both hot and cold temperatures. Examples of ALLSEASONGEAR include tights, jackets, and long sleeve shirts.^[17]

Recovery Gear: In July 2009, Under Armour introduced the Recharge compression suit, which is designed to relieve aches and pains after workouts, shortening soreness time and re-energizing the body. The company says the suit's high price tag ($200) is offset by the product's uniqueness and niche high-income market. ^[18]

^[11]

Trends and Forces

The regions of the world where Under Armour products are manufactured are very unstable

In 2007 53% of Under Armour Products were produced in Asia, 25% in Central America, and 19% in Mexico.^[19] Central America and Mexico are unstable regions of the world and have witnessed much political violence in recent history. Such violence could directly effect Under Armour as factories shut down or are destroyed, shipments are delayed or confiscated, or employees are attacked or leave their posts. As a result Under Armour would be unable to distribute in the United States.

Diversification into Footwear Market Takes Aim at Powerhouse Nike

Under Armour's attempts to penetrate the shoe market have been fairly successful with their performance cleats. In 2008 footwear brought Under Armour $84.8 million and the company is the official footwear sponsor of the NFL.^[20] Under Armour released a successful cross trainer shoe in the summer of 2008, selling about a million pairs in the first year that instigated a "sneaker war" with sporting goods behemoth Nike (NKE).^[21] Furthermore, UA released a series of running shoes during Superbowl weekend of 2009, further enflaming the shoe war with Nike.^[22] The launch included six models of running shoes, at a price range of $85-$120, which is about the average of Nike's running shoes.^[22] This move further into the footwear market marks another step in competition with Nike, with future plans to expand into the basketball, tennis, and soccer footwear markets.^[22] According to a Keybanc Capital Markets analyst, Underarmour is taking the right steps in expanding into footwear as its second growth phase, but positive financial results from this expansion might be delayed until late 2010 or beyond. ^[23]

Under Armour relies too heavily on a limited number of distributors

In 2008 31% of Under Armour's sales were to Dick's Sporting Goods (DKS) and Sports Authority.^[24] If either of these companies were to suffer, Under Armour's sales would be affected. Also the company does not enter into long term sales contracts with any of its key customers, relying on a good faith policy.^[25] Due to the lack of any contracts, these customers can take away business from Under Armour whenever they feel the need to. In addition, 75% of the company's wholesale distribution was through large format national and regional retail chains in 2008. ^[24]

UA is highly dependent on US for sales

In 2008, 91% of Underarmour's net sales came from the United States, and only 4.6% of net sales came from outside the US and Canada. ^[20] In contrast to Nike and Adidas, which have large presences in international and emerging markets, UA at present is dependent on the US for sales growth. While it is a small company and has the potential for expansion, short term declines in US consumer demand have the potential to negatively affect the company's bottom line.

Inventory Build

Looking at the historical inventory supply of UA, the trend has recently been increasing in the last few quarters, from 121 days at March 30th, 2007 filing to 171 days at December 31st, 2007. This 41% increase in inventory is not uncommon to UA, seeing that they experienced similar increases last year. But what is puzzling is that, this recent build is lasting longer then the previous year

Below is the seasonality excerpt from the UA SEC filing: "Historically, we have recognized approximately 70% to 75% of our income from operations in the last two quarters of the year, driven by increased sales volume of our products during the fall selling season, reflecting our historical strength in fall sports, and the seasonality of our higher priced ColdGear® line. Approximately 61% and 62% of our net revenues were generated during the last two quarters of 2006 and 2005, respectively. The level of our working capital reflects the seasonality and growth in our business. We generally expect inventory, accounts payable and accrued expenses to be higher in the second and third quarters in preparation for the fall selling season. Nonetheless, the high percentage of income from operations and net revenues in the second half of the year may have been in part due to our significant growth in net revenues."Being told that this inventory build is due to the seasonality, when comparing it to a competitor, Nike (NKE), you will see that UA is not managing the inventory as tightly as NKE.

This growing variance is also the main contributor to the difference in the total cash cycle between the two firms. [Exhibit 2]

Competition

Under Armour's main competition comes from large and well established apparel and footwear companies, such as Nike (NKE) and Adidas AG (ADDYY). These companies have international appeal and resources to match. Thankfully, Under Armour competes with them in a market that they specialize in. Therefore the company has been able to be both competitive and very successful despite the fact that their competitors have far more resources. Also Under Armour competes with other sportswear focused companies, such as Columbia Sportswear Company. These smaller companies, while more of a match for Under Armour in terms of resource, they too appeal to a larger base than Under Armour and are competing with the company in only one market. In their primary market, athletic apparel, Under Armour can claim 75% of the market share, with Adidas and Nike struggle to catch up.^[26] In the terms of the overall athletic market, Under Armour claims 31% of the market share, Nike 36%, and Adidas and other athletic companies claiming the remainder. Anaylsts predict however, that Under Armour could possibly surpass Nike in the near future if it continues its staggering growth rate.^[27]

References

1. ↑ UA 2007 10K, Item 1, pg.1
2. ↑ UA Business Website
3. ↑ UA 2007 10K, Item 1, pg.1
4. ↑ BusinessWeek "Under Armour May Be Overstretched, Stanley Holmes, April 30, 2007
5. ↑ UA 2007 10K, Item 1, pg.1
6. ↑ Google Finance UA
7. ↑ ^{7.0 7.1} Citybizlist Baltimore: Under Armour Reports Q4 Results
8. ↑ Wikinvest: UnderArmour Reports Q4 Results
9. ↑ UA 2007 10K, Item 1, pg.1
10. ↑ UA 2007 10K, Item 1, pg.1
11. ↑ ^{11.0 11.1} UA 2008 Annual Report, page 5
12. ↑ UA 2007 10K, Item 1, pg.2
13. ↑ UA 2008 10-K, Item 8 "Financial Statements", page 73
14. ↑ UA 2007 10K, Item 1, pg. 2
15. ↑ UA 2007 10-Q, pg.4
16. ↑ UA 2007 10-Q, pg. 4
17. ↑ UA 2007 10K, Item 1, pg.2
18. ↑ "Under Armour's New Recovery Suit"
19. ↑ UA 2007 10K, Item 1, pg.16
20. ↑ ^{20.0 20.1} UA 2008 Annual Report, Item 16, pg.73
21. ↑ Sharrow, Ryan. "Cross Training Shoes next Under Armour footwear foray" Baltimore Business Journal. 31 July 2007.
22. ↑ ^{22.0 22.1 22.2} "Under Armour makes a run at Nike with new footwear line" USA Today 12/9/2008
23. ↑ MSN Money, "Sector Snap: Athletic Apparel"
24. ↑ ^{24.0 24.1} UA 2008 Annual Report, Item 1, page 5
25. ↑ UA 2007 10k, Item 1, pg. 13
26. ↑ Kevin Kelly, "Under Armour: Overvalued and Vulnerable" 16 Jul 2007
27. ↑ Douglas McIntyre, "Cramer backs Nike and Under Armour" 17 Nov 2006