Does Nike Want to Buy This Competitor?
Gerelyn is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Happy Birthday Under Armour (NYSE: UA). November marks the synthetic-clothing pioneer's seventh year as a publicly traded company. Since 2005, Under Armour's stock has increased eightfold and the company has ambitious expansion plans for the future. With sales having surpassed the $1 billion milestone in 2010 but still below $10 billion, which according to an article in Barron's is a prime size range for takeover candidates, could Under Armour be on the radar screen of some bigger sports apparel company, such as global leader Nike (NYSE: NKE)?
The question has been asked before. But given the fact that Under Armour's size has encroached on a sweet spot and the company's footprint on the footwear business is deepening, it seems fair enough to pose the question again.
Upon surpassing $1 billion in sales, Under Armour is now pegging sales at $1.8 billion as its 2013 threshold. This positions the company once again in that sweet-spot, according to Barron's. But given Under Armour's unique culture and Nike's strategy to grow the company incrementally, the pair falls short of a match made in heaven.
As one market source explained it, even though Nike wants to be on top of the competition, rivalries bring out the best in the company.
Nonetheless, Under Armour sure seems to be treading on the turf that has long been dominated by Nike and other industry leaders, like Adidas -- footwear. According to Kevin Plank, Under Armour's CEO and founder, the company continues to innovate in this category.
For instance, Under Armour is growing its market share in cleats. It is the official supplier to Major League Baseball, and can boast of NFL quarterbacks, including Carolina Panthers' Cam Newton and New England Patriots' Tom Brady, sporting its cleats.
Of course, mega-stars don't sport the Under Armour logo as spokesmen for free, and these contracts are in fact an expense for the company. Nonetheless, it surely has played a part in brand awareness for Under Armour. Incidentally, Nike just revealed that it is no longer in a marketing relationship with Lance Armstrong, according to The Wall Street Journal.
Speaking of which, Under Armour's marketing campaign began as positioning the synthetic-shirt maker as an enemy to cotton. But when Plank realized that the majority of customers still wore cotton in addition to its synthetic product, he changed his tune. Since then, the company has grown its revenues from cotton from zero in 2009 to nearly $200 million projected for 2013, said Plank at the Baron Capital Management investment conference.
Next for Under Armour appears to be a focus on its direct-consumer business. It earns approximately 30% of its revenues from its top three retail accounts including Dick's Sporting Goods (NYSE: DKS) and Sports Authority, the former of which just opened its 508th U.S. store located in Sanford, Florida. Dick's Sporting Goods has been opening new stores from New Mexico to Virginia all in the month of October. Since July, shares of Dick's Sporting Goods have climbed some 4%.
Nonetheless, Under Armour's growth in market segments such as children's clothing have been stifled by the amount of floor space that sports retailers devote to kids' apparel, which is lacking, according to Plank.
The Baltimore, Maryland-based company also has its sights set on international expansion, including China where it has two locations in Shanghai, in addition to a recent spotlight on women's apparel. For the latter, Under Armour recently hired Leanne Fremar to lead this initiative.
So would Phil Knight ever engage Plank in takeover talks, something that Andrew Ross Sorkin of CNBC recently asked the Under Armour CEO. Plank responded that if presented with an offer that bested the company's market-cap, he would have a "fiduciary responsibility" to his shareholders to accept to catapult the company into what he expects will become "the greatest athletic sporting brand in the world," he told CNBC's Sorkin.
Planks response begs the question: 'How high beyond market cap does a potential suitor have to go for the offer to be in the best interest of shareholders?' Nike had some $3.3 billion in cash and short-term investments in its fiscal 1Q 2013 on revenues of some $6.7 billion. Clearly, the world's biggest sports apparel company could acquire Under Armour, which has a market cap of about $5.7 billion, if they really wanted to. But once again, Nike seems to have its sights set on climbing new mountains, not going around the ones it has already conquered.
Whether Under Armour becomes the mega-brand it desires to achieve organically or with the muscle of some industry leader like Nike, the company certainly appears to be on a strategic expansion path -- segment by segment, region by region. As long as it stays true to its identity, which it appears to be doing as evidenced by the way Plank protects the company's unique culture, Under Armour is one of those stocks that is likely to benefit over the long term from the company's ability to grow its top line and increase market share.
GerelynT has no positions in the stocks mentioned above. The Motley Fool owns shares of Dick's Sporting Goods, Nike, and Under Armour. Motley Fool newsletter services recommend Nike and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.