Don't Give Up on Under Armour's Growth
Josh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Preparing for Under Armour's (NYSE: UA) upcoming Q4 earnings on the 31st, I will take a deeper look at the apparel company and determine its long-term investing potential. With traders nervous about UA's future growth runway over the last 3 months, the market has watched as 20% of the company's value has disappeared.
Despite the sell-off, Under Armour's P/E is still high at 45 and many are calling for a further decline in price as growth rates have begun to slow. With this in mind, I will preview UA's 4th quarter and determine whether or not they can justify their hefty valuations.
A Slight Twist on the Foolish 5 & 3
Today I'm going to borrow a technique from The Motley Fool's Stock Advisor service, called the "5 & 3." Usually a 5 & 3 consists of 5 positive and 3 negative events to keep an eye on during the upcoming earnings call. While this technique is incredibly useful by itself, I wanted to try something slightly unorthodox by mixing the 5 & 3 with my favorite technique, a simple SWOT analysis of the company.
By observing 5 positives, (3 opportunities and 2 strengths) along with 3 negatives, (2 threats and 1 major weakness) I hope to obtain a useful mix of current conditions and future possibilities. By focusing more on opportunities and threats, I hope to create a more forward-looking stance on earnings calls. Without further ado, here are 3 opportunities to watch for with Under Armour.
1. Geographical Expansion- 94%. Yes -- 94% -- of this $5 billion company's revenues comes from the North American continent. With continued growth from its main continent and ANY growth internationally, UA's growth runway couldn't look any brighter. Armed with a new marketing deal with the English Premiere League's Tottenham Hotspur, Under Armour is looking to take the plunge into the world's largest apparel market.
Furthermore, with the Chinese sportswear market expected to grow from $13 billion in '10 to $30 billion in '13, Under Armour has an immense opportunity to expand upon its almost nonexistent status in the country. With one shop set up in Shanghai as of 2012, UA's Chinese growth runway has barely even begun. Look for further international growth in Q4 with increasing growth rates, as revenue was only up 1% yoy in Q3 results.
2. Shoes and Accessories- While it may not have much of a sales presence in China, Under Armour considers its office in Guangzhou to be the "epicenter" of its footwear and accessory business lines. As they decide to slowly dive into the Chinese and Asian markets more fully, they will see huge synergies already having a manufacturing plant in the region.
Outside of its Asian growth possibilities, UA's shoe business now generates 15% of company revenues as of the 9 months ended in 2012, and grew at a rate of 29% yoy. Similarly, UA's accessories line is growing rapidly as well with a 28% yoy jump to compose almost 10% of company revenues. Look for similar growth rates from these 2 lines as UA tries to expand its offerings outside of its apparel business.
3. Direct to Consumer Growth- As Under Armour grew revenues $107 million in the 3rd Quarter of 2012 yoy, they made it clear that one of their major growth areas would be the Direct to Consumer line. By adding 21 in-house stores, UA grew its storefront 26% and saw a $32 million increase yoy in its personal retail brand in the 3rd quarter.
Representing roughly 30% of UA's revenue growth, it will remain essential to continue growing its own personal line as it produces higher revenues and makes the company more self-sufficient. Check the results from the 4Q earnings call and make sure this line continues its expansion.
1. Revenue Growth- Boasting 10 consecutive quarters of revenue growth above 20% and 12 consecutive quarters of apparel revenue growth above 20%, it is plain to see that Under Armour has delivered on the top line consistently. Furthermore, with EPS growing at a 22% rate over the last 5 years since the recession, Under Armour shows their ability to grow earnings in line with their tremendous revenue expansion.
Look for UA to continue their streak of 20% or higher revenue growth as they expect 22%-24% growth in Q4.
2. Premium Pricing- By maintaining a premium image with the majority of its products, Under Armour is able to compete more effectively with some of its largest peers. By posting a Gross Margin of 48.1% and an Operating Margin of 10.5%, UA compares favorably to Nike (NYSE: NKE) and Adidas (NASDAQOTH: ADDYY), as they post Gross and Operating Margins of 43.1%, 11.8% and 47.3%, 8.1%, respectively.
In a margin-sensitive industry, it will be pivotal for Under Armour to maintain these and grow those margins. Look to see continued margin expansion in their Q4 10-Q.
1. Nike- As UA is seasonally biased towards making most of its money in the 3rd and 4th quarters, Nike is a stark contrast, as its 4th quarter is its slowest. It will be essential to see if UA can keep its edge on its cold weather-related wear as it not only goes up against Nike but niche providers such as Columbia.
As for their shoe-related operations, Under Armour will have to prove itself against the behemoth that is Nike. Running the gamut from cost conscious running shoes to premium priced Air Jordans, UA will face an uphill battle in trying to gain ground in the shoe market. Annual developments such as its UA Spine will be pivotal in competing against such a well established brand. Look for continued growth from UA in its shoe segment down the road.
2. Adidas- In much the same way they will have trouble entering the shoe market versus Nike, UA will have to fight and scratch its way into Europe. With Adidas holding the title for being the largest sportswear manufacturer in Europe and Germany, UA will have a tremendous hill to climb, regardless of its English Premiere League advertising.
Look for specific revenue growth in Europe and see if it can be sustained going up against not only Adidas, but Puma, and a wide variety of European specialty companies.
1. Cash- The biggest area of weakness that I believe currently faces Under Armour is simply its low cash levels. With cash on hand of $160 million versus debt of $70 million, UA doesn't face debt issues, but it simply does not generate large amounts of cash. With a Cash King margin of only 5%, they may face issues expanding if they cannot keep enough cash on hand.
Look for stronger profit margins in future earnings calls and boosted Cash King margin, hopefully closer to Nike's margin of 8%.
Foolish Final Thoughts
With this 5 & 3 SWOT analysis on hand, I should be ready for Under Armour's earnings call on the 31st as I'll have a few key metrics and catalysts to check up on. With analysts expecting $0.46 EPS for Q4, a jump of almost 50% from the same quarter in 2011, UA still has a lot to prove to justify its generous valuations.
joryko has no position in any stocks mentioned. The Motley Fool recommends Nike and Under Armour. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!