Before Under Armour (NYSE:UA) launched into the mainstream, typical workout apparel was not anything that you were very proud to wear — maybe a t-shirt one size too large that you found at the bottom of your drawer and a pair of raggedy shorts. Now, largely due to this company, you probably purchase clothing that is specifically for exercising and may think, as I admit I do, that your workout apparel makes a statement about your athletic prowess.
UA has become one of the most popular makers of sports clothing and has attracted a strong customer base by establishing itself as a leader of innovation in the athletic apparel market. As a New York Times piece from several years ago noted, the company transformed the sports undergarment into a product for which consumers are willing to pay top-dollar. Its moisture-wicking compression shirts launched into the mainstream sports clothing market years ago and have become very visible on athletes.
Although competitors such as Nike (NYSE:NKE) — the industry’s hegemon — have tried to copy its tight-fitting clothing, it is Under Armour’s compression gear that seems the most popular.
Under Armour’s stock performance in the last year has been impressive as its share price has more than doubled, but in the past month the price has fallen, dropping approximately 18% from its April peak. I propose taking advantage of this pull back by investing in Under Armour at this reduced price.
One may ask why I argue for getting into Under Armour at a time when the stock has recently been underperforming. The answer: The company still offers tremendous growth potential. This provokes the question of what could spur such growth.
In 2010, the company posted its first revenue of over $1 billion. While crossing the $1 billion mark was a noteworthy step for Under Armour, the sports apparel industry is a $28 billion market according to the Sporting Goods Manufacturers Association. This means that Under Armour controls less than 4% of the market and has enormous potential to grow. In addition, Under Armour’s direct-to-consumer sales are increasing. Currently, the majority of the company’s revenue — 73% in 2010 — comes from selling its products to third parties such as local sporting goods stores and larger retailers like The Sports Authority (TSA). With this the case, Under Armour offers its merchandise to these stores at a lower price than it would sell directly to consumers.
However, with rising direct-to-consumer sales -- which grew 53% year-over-year in the first quarter of 2011 -- the company can charge non-discounted prices and look to earn larger profits. Under Armour hopes to further increase direct-to-consumer sales by maintaining strong online sales and opening new stores — 25 of which have been set to open in the first half of this year to expand its small 63 store base (Standard & Poor’s May 21 Report on UA).
Here’s another likely source of growth: Under Armour has launched its new product line “Charged Cotton,” continuing to showcase its innovation and diversifying from its traditional polyester apparel by introducing a new collection of men’s and women’s shirts and shorts made from a newly created high-performance cotton. Analysts expect the cotton line to give the company a significantly larger addressable market, as Standard & Poor’s states that Charged Cotton widens Under Armour’s market three to four times and Credit Suisse estimates that the market for cotton is up to 10 times greater than that for synthetic shirts (Credit Suisse’s January 27 Report on UA). With a wider market, Under Armour can look to increase sales and strengthen earnings.
Overall, Under Armour is still a relatively small company with a bright future. It has a market capitalization of approximately $3.3 billion, which is only about 1/12 the size of Nike, and offers potential for huge growth and large market share gains.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.