Under Armour (UA) has grown explosively in the last 6 years. Revenues have gone from $281 million in 2005 to $1.064 billion in 2010, up nearly four-fold. The company's signature moisture-wicking, tight fitted clothing sparked an explosion in the synthetic sportswear appeal segment, leading to similar products from Nike (NKE) and Adidas, UA's two main, much larger competitors.
The size of the competition does not seem to be hindering UA, as it is forecasting 2011 revenue growth of 25%-27% and operating income growth of 27%-31% compared to 2010. Thanks to a strong brand name, increased marketing, and rapid expansion in Direct-to-Consumer sales, Under Armour is poised to continue its growth, catching up to larger rivals both in terms of revenues and market cap.
Under Armour's sponsorship obligations more than doubled in 2010, from $78 million in 2009 to $167 million last year. Athletes now under contract with UA include Patriots QB Tom Brady, Heisman Winner Cam Newton of Auburn's NCAA National Title winning team, Giants Catcher and NFL Rookie of the Year Buster Posey, Milwaukee Buck's Brandon Jennings, not to mention long time UA athletes in the Raven's Ray Lewis and Michael Phelps. On top of these athlete specific deals, UA will become the official footwear supplier for the MLB in 2011, the official supplier of gloves to the NFL in 2011, and is already the sponsor of the NFL Combine. All these contracts will keep the Under Armour logo on millions of TV screens during the thousands of games televised across all the major sports leagues in the coming years, exposing the brand to tens of millions of youth athletes, who in time will grow into loyal Under Armour customers.
The company also sponsors the All American High School football game, and has deals with numerous collegiate sports programs, allowing it to reach Americans at all levels, from living room fans to High School stars, from college track teams to the MLB All Star Game. Under Armour's ability to sign these deals with major sports leagues and professional shows the growing strength in the company's brand, and will fuel further recognition and acceptance of Under Armour products.
UA's Direct-to Consumer business is another growing bright spot for the company. While selling products online via the company website and in UA run stores may seem unimaginative, the benefits of doing so are immense. Direct-to-Consumer net revenues were 23% of total net revenues in 2010, up from 18% in 2009 and grew at 57% compared to the year before. The increase in Direct-to-Consumer sales was cited in the Q4 and 2010 earnings press release as driving the 2 percentage point increase in gross margins. Under Armour's Q4 gross margins were 51.7% increasing gross margins to 49.9% for the year, both incredible numbers, especially given Nike's 45.3% gross margins as reported in Nike's most recent Q2 report and 2010 gross margins of 46.3%. Most of UA's factory stores are in the Northeast, and as the company expands from the East Coast to the rest of the US, both revenues and margins stand to improve. As UA continues to expand Direct-to Consumer sales, company-wide gross margins will continue to increase, further outpacing its larger competitors.
That being said, Under Armour is not a cheap stock. Based on 2010 EPS of $1.34, the shares are trading an en expensive 48 times earnings. However, the total market cap of UA is $3.2 billion, compared to $42 billion for Nike. Long term, UA should be able to close this gap, as higher brand awareness across multiple sports drives sales growth and high margins drive profitability. This is a brand in its early stages of growth, still expanding in the U.S. before it makes a more dedicated international push. Consider pullbacks towards the 50-day moving average around $60 as an entry point. Under Armour's brand is here to stay, its small size is not.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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