I recently made an investment in Under Armour (NYSE:UA) for my Project $1M portfolio. While Under Armour appears to be playing second fiddle to Nike (NYSE:NKE) in the battle for fitness footwear and apparel, Under Armour has a variety of things going for it which suggest a solid long term future.
Under Armour has managed to carve out for itself a brand reputation for innovation and performance in the fitness and apparel market. The company's innovative approach to technical design and performance optimization is best seen in the original design of apparel which provides moisture wicking and better body temperature regulation, all to aid muscle recovery and performance.
The success of Under Armour's early innovation is borne out in the performance of the company over the last decade. Investors in Under Armour have grown their invested capital almost 8x since 2006. Revenues and operating income at the company have also grown at a similar rate over this period of time. Under Armour has managed its business growth in a highly efficient way, with return on equity consistently in the mid teens over the last decade.
The more fundamental question is, where Under Armour's sales will go from here. While Under Armour has almost $4B in annual sales, it's still a much smaller player in the global athletic apparel market compared to Nike, who has in excess of $30B in annual sales.
What I believe will be supportive of Under Armour's continued growth is the overall growth in market for fitness apparel, both domestically and internationally, as well as Under Armour's connected fitness ecosystem. While fitness apparel market trends will lift other players in the market, I believe Under Armour has assembled something very unique as far as its connected ecosystem.
Under Armour has a relatively small international presence, with only 11% of its sales coming from international markets. US growth is on fire however and has been consistently been hovering around the 25% mark year on year for over 5 years. There doesn't appear any indication that this growth will slow in the near to medium term, particularly given Under Armour's ability to extend itself into new segments, such as outdoor.
The real opportunity to extend this growth platform will come from international markets, where Under Armour is less of a player. The reason this is such a tantalizing opportunity for Under Armor is that as disposable incomes increase in emerging markets, sporting and fitness activities will increase as consumers embrace leisure activities and personal development. A cursory examination of Nike's results shows sales growth of close to 30% in Greater China and Central and Eastern Europe in recent results. Greater China now contributes almost $1B in quarterly revenues for Nike.
While work will be required by Under Armour to build its brand presence in these markets, the right sponsorships should see market opportunities at least the size of its current US sales volume in international markets.
The other significant plank for growth for UA is via the Connected Fitness platforms that Under Armor has acquired over the last couple of years. With the acquisitions of MapMyFitness, MyFitnessPal and Edmondo, Under Armour has managed to acquire almost 120M connected fitness users.
These are groups of individuals that are predisposed to exercise and keeping fit. They represent a ready pool of people with a propensity to consume fitness apparel that Under Armor can not only regularly market to, but also leverage as a beta test platform for new product design. Almost as significantly, the detailed data available on individual users helps move Under Armour closer to an end state of personalized fitness gear tailored to an individual's specific exercise routine and goals.
With some creative intelligence at the back end and some high powered algorithms, Under Armour platforms can provide members of its fitness communities recommendations on exactly the right type of apparel for a given users workout goals, and correlate that apparel recommendation with real time performance feedback.
Of course, this has to all be done in a manner that doesn't alienate the user, but Under Armour has arguably bought itself the tools and the community to provide a continuous feedback loop and drive personalized apparel and fitness solutions for the next decade, all with the power of real time data.
Connected product users and ecosystems can be more easily notified when there are new products and complementary accessories available for purchase. Viral sharing of new apparel and equipment by friends and others influencers in the community will drive purchase decisions as much, if not more than paid sponsorship. This should prove invaluable for Under Armour's growth.
With all that said, what are Under Armor's prospects for continued growth?. Based on what I've outlined above, I believe Under Armor can continue growing sales at a rate averaging close to 20% for the better part of the next 10 years, such that it approaches close to $20B in sales volume by the end of the decade. At a 3x sales multiple like Nike currently trades at, I don't believe that a $60B valuation could be out of the question, or close to a 15% annualized return over the next decade.
Disclosure: I am/we are long UA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.