Bullish Outlook for Under Armour
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Consumer spending in the US has been on a sharp decline in the last few years, as the economy is still feeling the lingering effects of the financial crisis. However, there are still a few retailers that have surprisingly reported a sharp growth in all business units. One of them is Under Armour (NYSE: UA). The retailer has reported sharp growth in all the segments, as the total revenue for 2012 stood at $1.84 billion, marking 25% year on year growth. The company outdid all previous projections, which include its own guidance for 2012. The company experienced exceptional top line growth, as the net income also recorded a 54% growth from the previous year. Moving ahead, we expect Under Armour to increase its focus on international expansion, direct to consumer business and the footwear products. The 2013 outlook for the apparel retailer looks promising with an estimated growth of 20% to 25% in both net revenues and EBITDA. The stock seems all set to exceed all expectations.
Enhancing Core Business Segments and International Expansion
The company reported a huge growth in footwear and women’s products in 2012. Even though the market for these categories is highly competitive, Under Armour still has a huge potential to grow if it increases the distribution channels and continues the radical innovation in footwear technologies. In addition, the growth opportunities in the emerging markets like South America and Asia are extremely high due to increasing brand awareness and disposable incomes. Europe too provides several growth opportunities; however, emerging markets are relatively less saturated with slightly weaker competition from domestic retailers. Traditionally, Europe has not been a happy hunting ground for the American retailers, as the competition from the domestic retailer far too intense and the market structure is highly complex.
Under Armour competes head on with likes of Nike (NYSE: NKE) and Adidas. Nike is among the largest sportswear retailers in the world, with a market cap of $39.3 billion. The company is the world leader in athletic shoes and sports equipment. It generates a high volume of its revenues through branded footwear; however, the apparel business is increasingly becoming a trademark for the company. Nike’s key revenue stream has always been North America, however it expects good growth from Europe as the economy starts to recover.
2012 revenues were approximately $24 billion, making it one of the most valuable brands in the world. The current brand equity of Nike is in excess of $10 billion. Similar to Nike, Adidas too is the second largest sportswear manufacturer in the world and the largest in Europe and Germany by a huge margin. Adidas is a German group with a presence around the globe. The company too prides itself on athletic footwear, bags and t-shirts. Adidas has a market cap of $19.5 billion, and it currently trades on both the NASDAQ and Frankfurt Stock Exchange.
Retail Sales and Gross Margins
The apparel sales through the retail outlets contribute roughly 75% to the overall stock price. Hence, it is imperative to highlight that going forward this facet of the business will be a key driver for the company. If the company exceeds its 2013 guidance for apparel sales, then there may be an upside on the current trading price. The performance apparel of Under Armour is the market leader in the segment with a staggering 70% share. This segment has been a key contributor towards its success; on the contrary, the footwear and accessories business unit will find it tough to capture more market share, as it faces a stiff challenge from industry giants like Nike and Adidas.
In addition to this, the gross margins must be consistently maintained as we move deeper into 2013. Historically the gross margins have been above the 50% mark; however, in 2012 it dropped to 47% approximately. If the company manages to push the margins back to 50%, then we expect the upward trend for its stock to continue. Furthermore, if the gross margins reach 60% then the stock price could witness an even sharper upward rally. On the contrary, if the gross margins remain on a similar level to 2012, and the company fails to report the expected growth in earnings, then there could be a steep downside in the stock price.
Higher Intrinsic Value
With good numbers in the last few years and a decent outlook for 2013, the current share price of Under Armour may be slightly undervalued. The most astounding element has been the revenue growth since 2009. The company recorded 176% compounded annual growth in its revenues since 2009. According to Trefis, the company is expected to increase its FCF (free cash flow) in the next five years. This implies it will gradually reduce its CapEx as the positive impact from initial investments start to kick in, thus a higher valuation for the firm and a skyrocketing share price. If the company can achieve the planned growth in its FCF, then using the DCF model it can be easily established that Under Armour is currently undervalued. The growth witnessed in the performance apparel segment has been exceptional, and going forward we only expect it grow with possible expansion to other markets such as Asia, Europe and Latin America.
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