After a Blowout Quarter, This Apparel Company Is Still a Buy

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

Having been a fan of Under Armour (NYSE: UA) as both a company and an investment for some time now, I was beaming with joy when the company just recently reported a blowout quarter during which it beat nearly every expectation set by the analysts following the company. However, with shares up by about 12% since before the announcement, it is only natural to consider getting out of a position. While it is never a bad idea in a situation like this to take at least some of your position off of the table, in this case I think that Under Armour is just getting started.

Growing in the right ways

The main reason that I think Under Armour is still a great long-term growth play is that it is growing in all of the right areas, and not just from the same areas as in the past. While the company is and has been the clear, undisputed leader in “compression-wear,” Under Armour is growing the areas of its business that until now had been either struggling or non-existent.

For starters, apparel revenues increased by 23%, but the real story is the type of apparel that was responsible for the increases: the Storm and Charged Cotton product lines. Last time I blogged about Under Armour in January, I mentioned that the company had begun manufacturing cotton performance apparel in 2011, which is a $12 billion market as opposed to the $3 billion market for synthetic performance apparel. The fact that this line is growing at such a rate tells me that Under Armour has the potential to grab a significant share of his market, which could easily triple their revenues in a few years.

Also, Footwear has been an area where Under Armour has struggled in the past. Possibly the biggest surprise to me in the earnings release was the fact that the company’s footwear revenues soared by 21% from last year’s. Nike (NYSE: NKE) is the world leader in athletic footwear, commanding about half of what is estimated to be a $20 billion market. Nike really has no need to feel threatened by Under Armour just yet, as even after the gains, Under Armour’s footwear sales were just $82 million for the quarter, a small fraction of Nike’s. 

However, if this trend continues it could have a big impact on the bottom-lines of both companies. For Under Armour, whose annual sales are just over $2 billion annually, capturing a significant share of the athletic footwear market could be what they need to jump to the next level. For Nike, this could eventually become a problem for the company, especially if Under Armour starts capturing some of Nike’s overseas market share, an area in which it has been the clear leader for some time.

Where could it go?

Although the two segments of Under Armour’s business mentioned above are still in their infancy, there are even more areas of potential for Under Armour to grow. First is in its women’s lines, which currently make up less than 30% of the company’s sales. Second, and even more significant, is the $58 billion “active wear” market, which includes any athletic-inspired clothing not necessarily meant for use in training (think a t-shirt with Nike’s logo for everyday wear). Under Armour has barely tapped into this market, and there is a wide range of possibilities for the company to explore.

Speaking of the athletic apparel markets, a good way to monitor general trends in the company’s end markets is to add one of the sporting goods retailers, like Dick’s Sporting Goods (NYSE: DKS) to your radar. Dick’s gets a large portion of its revenues from apparel and footwear, and both Under Armour and Nike are among the top sellers, with Nike merchandise accounting for about 17% of Dick’s total sales. On the other hand, when Under Armour and Nike do well, it can be a good indicator of health in stores like Dick’s. These premium products generally carry larger price tags and mean more profits to retailers’ bottom-lines.

Final words

Despite the excellent quarter, Under Armour is still a relatively small company, with a market cap of around $7.3 billion (Nike’s is over $55 billion). If Under Armour keeps growing its footwear sales, and gets a little creative with their apparel lines, there is no reason why Under Armour can’t close the gap with Nike over the next decade or so. While it is completely reasonable to sell a portion of an existing position after a gain like this, there is no reason why the higher share price should keep you from making a new investment in this young and ambitious company.

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Matthew Frankel 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!

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