Hold on to This Sportswear Maker

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

Under Armour (NYSE: UA) has performed impressively in 2013, appreciating 53%. The question that keeps coming up is whether there is room for the stock to run higher or is it time to sell.

Well, the stock is already trading above its median target price of $71 and a correction might happen in the future. But, investors should not make any hasty decisions; Under Armour is a candidate for the long haul. Over the past two years, the stock has returned as much as 150% to its shareholders.

Quarterly results
In the second quarter, Under Armour reported a 23% increase in revenue to $455 million. It posted a profit of $17.6 million compared to $6.7 million last year. Earnings came in at $0.16 per share, ahead of analysts’ estimates of $0.14 per share.

Potential in the home market
Under Armour holds around 13.6% of the sports apparel market in the U.S., according to SportsOneSource. Nike (NYSE: NKE) leads the market with 29.7% and Adidas (NASDAQOTH: ADDYY) occupies third place with 7.1%. However, growth opportunities remain in Under Armour's core menswear business in addition to the fast growing women’s and youth line-ups. 

Under Armour has always been an innovative company, which has enabled it to take on bigger peers like Nike and Adidas. Its latest innovation, which will be in stores shortly, is thermal regulator called ColdGear Infrared. This will find its way to long-sleeved t-shirts and snowboard jackets. Other big innovations in the pipeline are Cold Black, Scent Control, Vent heat gear, etc.

Under Armour holds around 2.1% of the U.S. athletic shoe market according to SportsOneSource. Nike dominates this market with around 60% market share and its brands make up two-thirds of the 250 top sellers. Adidas is also gathering steam and after its Energy Boost sneakers, the latest are Springblade running shoes targeted at high school athletes.

Amid this raging battle between the bigger rivals, Under Armour is launching its own $120 “Speedform” running shoes. The key differentiating factor for these shoes is their fit, which the company claims to be the first of its kind. If these sneakers resonate with the runners, there can be some good market share gains in this category.

To leverage its increasing popularity, Under Armour is increasing its distribution. Wholesale partners such as Dick’s Sporting Goods, which currently has dedicated enclosures for Under Armour in 20% of its retail doors, will double it to 40% by the end of this year. This is over 240 doors in itself. There will also be more penetration in departmental stores. And finally, after the success of its first Brand House retail store in Baltimore, the next store will open in Tysons Corner this fall.

Global expansion
Growing internationally is an important agenda for Under Armour. Latin America will be a big focus and Under Armour will launch the brand in Brazil next year, ahead of the FIFA World Cup. By the time the Olympics happen in 2016, the company will have a much bigger presence. It is also looking at other Latin America markets like Chile, Argentina, and Peru.

Coming to Europe, Under Armour is looking to leverage the British Open and will slowly foray deeper into in the continent. In Asia, Japan and China are the two key markets. In Japan, it has 24 dedicated stores through its partners, while in China, there are five, and three more will be added by year-end.

Overall, international business is likely to be the company’s fastest growing business in 2014, and Under Armour’s aim is to expand it to 12% of total sales by 2015. Going by recent trends, where international sales grew 41% and 25% in the first and second quarters, respectively, the target definitely looks achievable.

Under Armour is trading at 40 times its forward earnings. Nike is trading at 19 times and Adidas at 11 times their forward earnings.

In its recently concluded fiscal 2013, Nike increased its revenue 11% to $25.3 billion. Over $10 billion came from the U.S. alone. The company increased its lead over Adidas in North America in its most recent quarter. It clocked a 12% sales improvement, compared to the latter's 2% decline. Nike is likely to see more upside from its newly launched Free Flyknit and Free Hyperfeel running shoes and Aeroloft and Dri-FIT Knit vests.

Adidas is trading lower mainly on account of its inconsistent performance in the past. The stronger Euro and lackluster demand in Europe will continue to be a headwind for it. In its recent second quarter, reported revenue fell 3.8% to €3.38 billion ($4.51 billion) while profits were up 4%. The company might improve if the new Energy Boost and Springblade sneakers turn out to be the game changers that the company expects them to be.

Under Armour’s high valuation is on account of its superior growth prospects. The company is looking to more than double its revenue to $4 billion by 2016. 

Last word
Under Armour investors should hold on to the stock as it is on an excellent growth path. The company has been increasing its revenue by more than 20% over the last few years and the trend should continue given its innovative pipeline, increased distribution channels, and growth in international business. 

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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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