The Next Nike?

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In the search for companies with amazing growth potential and exciting products, few companies are more compelling than Under Armour (NYSE: UA).  Under Armour is one of the leading performance apparel manufactures, marketing to athletes at all levels, as well as consumers with active lifestyles.  Currently, 71% of its sales are wholesale and 27% are direct-to-consumer.  Having grown tremendously since its founding in 1998, Under Armour’s products are widely recognized for its quality and uniqueness.

Under Armour is most recognized for its synthetic performance apparel (they practically invented the concept of compression wear), a $3 billion market in which it is already the leader with a 60% market share.  However, in 2011 Under Armour began manufacturing cotton performance apparel, entering the $12 billion “active-use” sports apparel market, a space in which the company has tremendous growth potential.  Over time, it is not infeasible for the company to capture a significant share of the giant $58 billion “active wear” market, which would require the company to produce casual attire in addition to their performance lines. This is a logical next step for the company given their level of brand recognition achieved in a relatively short time period.  Under Armour has a goal of growing their EBIT margins to around 15%, so you do the math as far as earnings potential over the long term is concerned. 

Since going public in 2006 at an IPO price of $15.50 per share (split-adjusted), Under Armour has done very well for its shareholders (see chart below), and I believe its true growth potential is just beginning to be realized.  Nike (NYSE: NKE), the sports apparel leader, for example, had over $24 billion in revenue and approximately $2.1 billion in earnings during fiscal year 2012, compared to only $1.83 billion in revenue and $127 million in earnings for Under Armour.  In order to achieve Nike-type numbers, Under Armour would have to expand its active wear and footwear lines significantly, which over time is very possible.  The company already has expressed its intentions to aggressively expand its women’s business, which currently accounts for only 28% of sales.  The company is also in the process of developing an international expansion plan, which should do wonders for revenues as the brand is not very well known yet outside of North America.

<img src="/media/images/user_14267/ua-chart_large.png" />

In terms of valuation, I believe comparison with Nike is not valid, based on the size difference and age of the two companies.  However, Lululemon (NASDAQ: LULU) and Gap (NYSE: GPS), which sells athletic clothing under its Athleta brand, are more direct comparisons, with similar revenue growth projected over the next several years. 

Lululemon currently trades at a lofty premium of 39.1 times 2012’s earnings of $1.84 per share, which are expected to grow to $2.27 and $2.85 in 2013 and 2014, respectively.  This implies an annual earnings growth rate of 24.5% over the next couple of years.  Gap currently trades at only 14.1 times 2012 earnings, however its earnings are projected to grow at a more modest 12.5% rate.  Under Armour trades at 38.9 times 2012 earnings, similar to Lululemon, however consensus estimates call for a higher 28.3% growth rate going forward.

Also to keep in mind, the other two companies already have a higher market share than Under Armour, which by definition means that Under Armour has more potential to grow over the long term.  With a current market capitalization of under $4 billion, only time will tell how much of the apparel marketplace Under Armour will capture, however with the brand recognition and respect they have already achieved, I would bet that the company will become a major player in the apparel industry over the next decade or two.

KWMatt82 has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica, 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!

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