Shares of Under Armour (UA) trade at very high multiples in the range of 35 times FY 2013 estimated EPS, highlighting the strong growth potential of the company. In fact, the company has posted 10 consecutive quarters of 20%-plus year-over-year sales growth. We believe that UA has a bright future ahead with many opportunities to grow sales and profits, though the market has largely recognized that. Based on our analysis we believe the key areas of growth for the company are market share gains in Apparel, growth in its Footwear Segment, domestic retail expansion and international expansion. We look at each of these opportunities in more detail below. Our current price estimate of $53 is in line with the market price.
Market Share Gains in Apparel
The domestic sports apparel market according to our estimates is approximately $50 billion. Under Armour's market share has increased to nearly 3% from 0.6% in 2003, while Nike's share has roughly stayed flat at 7% over that period. As Under Armour's brand recognition increases in the U.S. and as they continue to innovate and enter new apparel segments, their market share should continue to steadily increase. In 2011, UA introduced "Charged Cotton," which helps accelerate evaporation of moisture. Also, in 2011 it expanded its partnerships by becoming the official performance footwear supplier of the MLB and partnered with the NBA to be able to market athletes wearing their jerseys and footwear. The company has also been expanding its women's offerings and recently launched Armour Bra and Studio brands catering to women.
The company started selling footwear in 2006 and since then the contribution of this segment has steadily grown to 12% of sales. The company estimates that the addressable footwear market is $26.4 billion, of which they currently only have $200 million in sales, or ~0.7% market share. Nike, on the other hand, has domestic footwear sales of ~$6 billion. Recently, Under Armour launched a new running shoe called Charge RC that has gained traction with consumers. This segment is still in its nascent stage for UA and if successful, can mean significant growth for the company. Whether or not the company is successful in this segment will depend on the brand's appeal to consumers.
Domestic Retail Expansion
Under Armour is looking to expand its retail footprint in the U.S. by adding factory stores. The company has approximately 75 outlets in the U.S., and we expect them to add 20 to 25 stores per year, driving retail revenues higher by 20% to 25%. If sales per square feet within these stores increases as well, we can see an even faster growth rate for this channel.
Under Armour is just scratching the surface internationally, and we see a long runway of growth for the company outside the United States. Currently, only 6% of the company’s sales come from outside North America compared to almost 60% of Nike's sales coming from international markets. Under Armour has been making efforts to expand its brand awareness internationally by partnering with English Premier League team Tottenham Hotspur. As the company's brand awareness permeates international markets, we believe it should see revenues increase significantly. Given its success in the U.S. against strong competitors such as Nike and Adidas, we don't see any reason why it could not replicate a similar success in other markets.
Though Under Armour has a bright future ahead and many different growth vehicles, we believe the current valuation reflects this enthusiasm. Our price estimate of $53 is 1% below the current market price.
Disclosure: No positions.