New Sell Initiation for Under Armour

18-FEB-09 - Under Armour, Inc. (UA): While UA remains a premier brand, fewer people can afford to pay up for the gear and thus we don’t believe investors should pay up for the shares. We expect growth to slow and valuations to compress given the challenging economic environment. Initiating with SELL rating.

INVESTMENT THESIS

• UA remains committed to maintaining its brand which we infer to mean pricing will remain relatively unchanged. Given distressed household budgets we expect this to lead to reduced unit sales.

• The best potential catalyst for the shares is the launch of UA’s line of running shoes. Given the macroeconomic backdrop we don’t expect this to provide the desired boost management is looking for.

• Big box retailers continue to suffer which adds an additional negative both due to reduced store count and hyper-promotional activity within stores.

• UA has historically traded with a rich valuation and deservedly so until now. As with many growth stories, as growth slows multiples contract and we expect UA to be no different.

• We are initiating coverage with a SELL rating.

RISKS

• Lesser penetrated categories such as Youth and International provide a lift to offset weakness elsewhere.

• The running shoe launch provides a meaningful catalyst in the near term while also opening up a large, new category for UA.

SUMMARY

When the going is good, it is good to be a premium-brand growth stock. Unfortunately, as that growth slows multiples can contract quickly as investors recognize that slowdown. This is what we expect to occur with UA. It’s brand is synonymous with high performance athletic apparel and has become ubiquitous at the professional level in all major sports. Moving down the ladder, from college athletics to recreational exercise, people have migrated to high performance athletic wear, with UA leading the way. During times of economic wealth and strong employment, UA’s premium pricing was tolerable but that macro backdrop has now changed markedly. Given the discretionary nature of UA’s products, combined with the premium pricing, it is difficult to justify the expense in the face of constrained household budgets. At the professional level the price points are largely irrelevant but we contend that this market segment is already extremely well penetrated by UA and thus currently consists of “replacement” sales as older apparel and gear wear out. Categories where UA has ample room to grow, such as Ladies and Youth, are more likely to be affected by substitution in our opinion. Taken together, these inputs all point to slowing growth for UA. As growth slows, we expect valuation multiples to contract.

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Safe Harbor Statement
This document contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are subject to risks and uncertainties that could cause actual results to vary materially from those projected in the forward-looking statements. The company may experience significant fluctuations in future operating results due to a number of economic, competitive, and other factors, including, among other things, our reliance on third-party manufacturers and suppliers, government agency budgetary and political constraints, new or increased competition, changes in market demand, and the performance or reliability of our products. These factors and others could cause operating results to vary significantly from those in prior periods, and those projected in forward-looking statements. Additional information with respect to these and other factors, which could materially affect the company and its operations, are included in certain forms the company has filed with the Securities and Exchange Commission.