This Sportswear Company Is Spreading Its Wings

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What more can one ask of a company that grows its revenue at double digit rates year after year, challenges the who’s who of the industry, and grows its stock price by 900% over a span of just four years?.

I am talking about Under Armour (NYSE: UA), the company that touched our childhood days with the super hero tees. But, that small company is now a big force to reckon in the sportswear market, with annual revenue of $2 billion and market cap in excess of $6 billion.

It is now aiming even higher. Armour has announced big international plans that will help it achieve its target of doubling revenue to $4 billion by 2016.

Going global

According to Euromonitor, in 2012 the global sportswear market was over $244 billion in size, having clocked growth in excess of 7.5%. The four largest countries accounting for more than 50% of this market were the US, China, Japan and Brazil. The US was the single largest market at $80 billion, and the global sportswear market is expected to see incremental sales of $55 billion over the next four years.

Currently, Under Armour does not feature anywhere on the global map with its 2012 international revenue of $108 million. Although it clocked a 40.6% increase in international revenue in the first quarter of 2013, standing at $81 million it was just 6% of Under Armour’s total revenue.

So, Under Armour has to leverage the global opportunity it has to spread its wings. To do this it will use a franchisee model and organize its international efforts into four regions, concentrating on the key markets in those regions.

The four regions will be Western Europe, Latin America, Asia, and, all other markets combined. In Western Europe, Under Armour will target the UK, Germany, and France. In Asia, it will target China, Japan, and South Korea. And in Latin America, the company will focus on Brazil, Mexico and Argentina. This would take care of the three biggest markets outside the US, as well as other high-growth areas. Within the next two years, the company will set up subsidiaries in Australia, Mexico, Chile, and Brazil.

Under Armour is expecting that international operations would generate around $640 million, or roughly 16% of the $4 billion in sales that it is targeting by 2016.

Not an easy task

The global market is dominated by stalwarts like Nike (NYSE: NKE) and Adidas (NASDAQOTH: ADDYY). Both companies generate around 60% of their total sales from outside North America and Europe, respectively. This amounts to $15.3 billion in international sales for the former and $11.5 billion for the latter.

The market dynamics are completely different in the different markets. For example, the European sportswear market is much more fragmented than the US. According to ISI data sources and as quoted by Bloomberg, the six largest retailers in the US account for 75% of total industry sales, while in Europe the top nine account for around 37%.

Nike and Adidas already have their logistics in place. Although Under Armour has been putting its supply chain agreements in place for the past few years, it still has a long way to go.

Next, the shortest route to getting international exposure is by sponsoring big events. But it will be sometime before Under Armour can scale up its promotions to any comparable level. Meanwhile, with the Fifa World Cup and the Olympics approaching, both Nike and Adidas are going for the kill. Nike is the official sponsor of the Brazil football team, while Adidas is one of Fifa’s six global partners. The big sporting events inevitably create ripples in market dynamics. In the London Olymics, Adidas narrowed its market share gap with Nike in the UK.

As we are one year away from the World Cup, Nike and Adidas are spending heavily on building the excitement over their brands. According to SEC filings, Nike’s future endorsements alone stand at $3.8 billion or roughly double that of Armour’s 2012 annual revenue.

Always an underdog

The global challenge is daunting for sure, but bigger players cannot ignore Under Armour. It has already grown its share in the US sports apparel market to around 13.65%, according to SportsOneSource. This is not bad if we consider that market leader Nike has 24%.

It is also significant that Under Armour’s compounded annual growth rate (CAGR) in apparel over the last three years has been way ahead of either Nike or Adidas. Under Armour’s had a CAGR of 27.4% in this segment between 2010 and 2012, which is nearly triple that of Adidas’ 8.1% and more than double Nike’s 12.3%. This is definitely impressive even if we factor in that a smaller company will grow at a higher pace than industry veterans.

Last word

Under Armour is a company that investors have always associated with excellent rewards. With the company gearing up to cross borders, it looks like better things are in store. The increasing global demand gives it an excellent platform to fuel growth at the rapid rate that one has come to expect of it. There will be bottlenecks for sure but then Under Armour has this knack of overcoming the steepest of challenges. 

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Eshna De 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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