Under Armour: New Focus On Basketball And Women To Boost Sales And Justify Valuation

Aug.24.14 | About: Under Armour, (UA)


Signing Kevin Durant would greatly increase current footwear share of 3% and basketball footwear share of 0.7%.

Global campaign aimed at women is boosting women's category, a market that could rival men's apparel at the company.

Second quarter was 17th consecutive quarter of revenue growth 20% or greater.

Under Armour (NYSE:UA) has been in the news a lot during the month of August. The sports apparel retailer launched a large global campaign aimed at women and also has its eyes set on its largest marketing deal ever. A targeted approach at women and the possible signing of NBA superstar Kevin Durant will have a huge impact on short and long term growth and could finally justify the high valuation Under Armour shares command.

Under Armour is close to signing a huge endorsement deal with NBA superstar Kevin Durant, of the Oklahoma City Thunder. The deal on the table is said to be in the range of $265 to $285 million over ten years. This annual figure of $26.5 to $28.5 million would represent around 10% of Under Armour's current marketing budget.

Back in 2007, Nike (NYSE:NKE) signed Durant to his first NBA deal worth $60 million for seven years. Durant turned down a $70 million deal from Adidas, due to his familiarity with Nike and likely the dominance of the apparel company. Turning his back now on Nike in lieu of a higher payout speaks volumes about the potential he must see in Under Armour. Another link to Under Armour is the fact Durant grew up in Maryland, less than 50 miles from Under Armour's headquarters.

A current look on the Nike website shows a range of products under the Kevin Durant line. Items like men's tights, shoes, backpacks, socks, hats, hoodies, shorts, and t-shirts can all be purchased. Shoes are the key for Nike and also for the Under Armour deal. In 2013, Durant's shoe sales increased an astonishing 400% to $175 million. In 2012, Durant's shoe sales doubled from $15 million to $35 million.

The $175 million figure trailed only Lebron James, who saw footwear sales of $300 million in 2013. Nike pays Lebron an estimated $20 million annually for his endorsement. After James and Durant, there is a big dropoff in branded shoe sales. Durant outsells number three Kobe Bryant by 3.5 times. In 2013, Under Armour had only a 0.7% market share of basketball shoes, compared to Nike's 92%. Other players, Reebok and Adidas, had shares of 1.4% and 5.5% respectively.

Durant is regarded as the second best current NBA player, behind Lebron James. His stardom continues to rise as the Thunder improve and his statistics rival that of James. On Twitter, Durant has 7.9 million followers, short of Lebron's 14.1 million, but well ahead of once NBA endorsement superstar Kobe Bryant who has 5.6 million.

Adding Durant to the Under Armour NBA lineup would complement an already growing portfolio of athletes. For the NBA market, Under Armour has signed deals with Stephen Curry, Brandon Jennings, Kemba Walker, Greivis Vasquez, Corey Brewer, and Will Barton.

Perhaps the biggest reason to sign Durant to a deal is the increasing focus on footwear for Under Armour. The company saw its July shoe sales rise 40% from June to July. The company's footwear market share rose to 3% in the United States. This followed an impressive June that saw shoe sales rise 30% from the prior month. At that time, Under Armour had a 2.8% market share in the United States.

Under Armour is well behind market leader Nike. In June, Nike had a footwear market share of 60%, when including its Jordan brand. Nike and Jordan also had 127 and 32 of the top 250 selling shoe brands in the second quarter respectively. Under Armour had only 10 on the list. Nike has been dominant for quite some time, which could give Under Armour the edge as the new player.

Under Armour is investing in new technology and signing big endorsement deals to boost shoe sales. The company's market share continues to rise and new launches under the NBA and running line will likely give an even wider market share by the end of the year.

Much like the Notre Dame deal that was signed, the Kevin Durant one is rumored to be coming with stock options. Essentially, Under Armour pays Durant his annual endorsement fee, but also gives him stock options to cash in on the future success of the brand he is helping create. Under Armour is also said to be providing Durant with other incentives, including a community center named after his mother.

The other big August event was Under Armour's global campaign aimed at women's apparel. The "I Will What I Want" campaign features new endorsees and centers on women's athletic abilities to do anything they want. The campaign features athletes Misty Copeland (ballet), Lindsey Vonn (skiing), Sloane Stephens (tennis), Kelley O'Hara (soccer), and Brianna Cope (surfer).

CEO Kevin Plank highlighted women's as one of the five pieces of business bringing diversity during the recent earnings call. He said that women's apparel has the potential to be as big or bigger than men's apparel. In the second quarter, women's sales grew 26% from the prior year. The addition of several women's apparel items and also a better split of retail space in Under Armour stores is helping boost the sales levels in the women's category. Strong growth in running and studio women's apparel was also highlighted in the second quarter.

Another key for women's apparel might be Under Armour's sponsorship with the USA Gymnastics team. The company will create the team's uniforms, but will also create team apparel for consumers centered on the upcoming Summer Olympics of 2016 and 2020. With its entire team sponsorship, Under Armour will be able to see its logo displayed on the highly watched television event.

Women's apparel is a huge global market. Under Armour has taken its knowledge of the men's brand and now tiered it to women with new focuses on additional categories. The company highlights sports, but also yoga, pilates, and running as activities that women do on a daily basis and need apparel for. Under Armour has a huge potential in the women's category and its global marketing campaign shows how focused it is on capturing the market share and dollars that come with women.

Recent second quarter results once again showed off the growth for Under Armour and impressive results in several key areas. Total revenue increased 31% to $610 million. Apparel revenue rose 35% to $420 million. Footwear sales increased 34% to $110 million. Accessories rose 18% to $60 million. Direct to consumer sales made up 31% of the company's total and saw an improvement of 38%. International sales rose 80% and represented 8% of the quarter's total sales.

Back in January, I wrote on how Notre Dame, the Winter Olympics, and Johnny Manziel could all have big impact in 2014 for shares of Under Armour. The Winter Olympics didn't work out that well as the speed skaters fell short at the games and actually criticized their outfits. Manziel of course signed with rival Nike, despite Under Armour's attempts to lure him in. Notre Dame continues to be a story for 2014 and beyond as the highly anticipated college football season starts soon featuring new Under Armour Notre Dame jerseys and apparel.

Analysts on Yahoo Finance see Under Armour posting 2014 earnings per share of $0.94. That figure is expected to rise to $1.20 in fiscal 2015. Revenue for the current fiscal year is seen rising 29% to $3.0 billion. In fiscal 2015, analysts see revenue growing 23% to $3.7 billion. The company sports a current market capitalization of nearly $15 billion, or five times annual sales. Under Armour raised its full year guidance during the second quarter call, giving a range of $2.98 to $3.00 billion for full year sales.

Shares of Under Armour are up 66% since my January article and up a total of 60% in 2014. The company continues to tick higher and command a high price-to-sales ratio compared to rivals like Nike. The company also has a huge price-to-sales multiple of 5 times. The company's 17 consecutive quarters of 20% revenue growth is nothing to sneeze at and is why investors continue to get in this name for the long haul.

With a footwear market share of around 3%, Under Armour has a huge opportunity to take on rivals in a highly competitive, but high gross margin industry. With the addition of Durant and the introduction of a new Stephen Curry shoe, the company's basketball shoe share will rise dramatically and help the company expand in the hot basketball apparel market. Women's sales continue to be strong and the new targeted approach will confirm what the company said about women's being as big or a bigger market than men's apparel.

Under Armour has many growth segments going for it. Basketball, women's, and connected apparel, which I highlighted recently, are complementing already strong growth in international and direct to consumer. Ignore the high multiples, buy Under Armour and watch the investment grow over the next five to ten years.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.