Under Armour Analysis

This is an article/sample I wrote while applying for an analyst/writer position @ The Motley Fool, originally written, as mentioned in the article a week or so before the Under Armour IPO, when at the time, not a single analyst or journalist I found had written any commentary/analysis...

Enough About Me, Let’s Talk About U(ARM)

With the announcement last week of a proposed IPO this week, there has been increased speculation amongst stock pickers and pundits (ahem, Cramer – more on this later) alike on the outlook for maverick sports-apparel maker Under Armour, however general consensus appears to be almost exclusively positive. Considering I own a few of their products, fall smack-dab within their target-market, and as always am looking for high-growth money-making opportunities, I decided to tackle the issues at hand.

First, a little about the company. Under Armour was founded by former University of Maryland Football player Kevin Plank in 1996 with the intent to create a line of microfiber clothing that wicks perspiration away from the skin, keeping athletes cool, dry, and light during activity. Today, the company has expanded into a multinational success, with offices in the US, Canada, Hong Kong, and London, at over 8,000 retail locations including Dick’s Sporting Goods, The Sports Authority, Modell’s, and even the Army and Air Force Exchange Service.

I’ll make it abundantly clear so as to avoid any confusion, I am also quite bullish on UARM, however unlike most of the already sparse analysis out there right now, I’ll also identify and acknowledge some of the contrarian arguments. Let there be no mistake though, Under Armour Management takes a few hundred pages to discuss their company in its s-1 registration statement so this discussion is by no means all-encompassing, so just a little caveat.
Statistically speaking, UARM has 90% market share of the performance apparel market, that is to say that 9 times out of 10 when a customer walks into a Dick’s or Sports Authority looking for such apparel, they’re walking out with the Under Armour, even though Nike, RBK, and others offer almost identical products. This is a testament to the enormous brand value/equity that UARM has been able to develop. As the aforementioned Mr. Jim Cramer, host of CNBC’s “Mad Money” pointed out last week, UARM’s advertising campaign has attained tremendous success WITHOUT the use of a single professional athlete in ANY promotional material. Lets look at what this means: These days, virtually all sports marketing, and more broadly speaking, advertising towards the 18-35 crowd almost always includes some sort of celebrity or professional athlete endorsing the product. If UARM has been able to attain such success and growth without resorting to such practices, does that not speak volumes for the allure of the brand, and thereby the company? Think about it this way, if sales growth does in fact start to level off anytime in the future, they can always go out and find some pro athletes to endorse their products, and boost sales that way.

Under Armour’s business performance is no slouch either, and it’s not a surprise that its fundamentals reflect the power, toughness and absolute performance image its brand exudes to consumers. Revenue has grown over the past 5 years (2000-2004) at what I calculate as 107% and change CAGR, with net income to diluted shares increasing over 67% over that same time horizon, so the company is doing a pretty solid job at driving this massive revenue growth through to the bottom line. On the balance sheet side, total assets have increased, according to my calculations, a cool 99.5% from 2000 through the first 3 quarters of 2005 (for those playing the home game, that’s an increase from a little over $2 million to over $144 million). This appears to be a well run company, dare I say even a Foolish one.
For a little insanity check, I brought up some of these arguments for UARM in a conversation last week with one of my brightest, and generally more conservative friends, lets call him Bob, who brought up a few good points. First, he noted that the apparel/fashion sector tends to be more fickle than the general market as a whole, trends come and pass, but only a select few continue into perpetuity, and even fewer continue to record industry-leading performance each successive year. As I noted above, UARM has made itself into an extremely popular brand/image, yet Bob questioned how much of this short-term performance will be reflected in repeat-customers and long-term success. It seems to me this is a valid point, since Under Armour really does not have significant product differentiation compared to the similar products on the market, it follows then, that consumer’s decisions to purchase UARM products must be due in some large part to their first-mover advantage for one, but more importantly by the image associated with its products, which others like Nike for example, have been unable to cement in consumer’s minds. With their expansion beyond their historical market of younger male performance athletes, Under Armour has recently released a complete line of performance wear for women, as well as children. If, and I believe most factors point to this being the case, Under Armour can transfer the premier image it has achieved with the 18-35 year old male athlete to these new areas, it should maintain and strengthen its dominance in performance apparel.
As far as I know, as of today, Monday 11 November 2005, this is one of the most focused analyses on the company. I’m sure as the week progresses and the IPO date approaches you’ll see a flood of analysts reports and morning notes out there.

While it is still early in the Under Armour story, and the jury may still be out, I believe given the information available at the moment, UARM appears to be a well-run company, dare I even say, a Foolish one.