Under Armour looking to bring the “Baddest Brand” overseas

Scott Kitun/The Medillian

Scott Kitun/The Medillian

Under Armour, Inc. long-term growth potential is substantial as the mainly North American brand eyes competing against Nike, Inc. for its global share.

As one of the major sports business success stories in recent years, the self-proclaimed “Baddest brand on the planet” is no longer just a newcomer to the sports apparel market.

In the company’s first year, it generated around $17,000 in revenue. Fast-forward to the end of fiscal 2012, and Under Armour has grown to more than $2 billion in revenue.

While playing football at University of Maryland, Kevin Plank set out to build a company that could produce athletic equipment that could impact the athlete’s performance.

In 1996, Plank founded the Baltimore-based company in the basement of his grandmother’s house.

“It started with a simple plan to make a superior T-shirt. A shirt that worked with your body to regulate temperature and enhance performance,” the company says on its website.

Its first big break occurred in 1999, when Warner Brothers Entertainment Inc. contacted Under Armour to outfit its upcoming Oliver Stone movie, “Any Given Sunday”, a football movie staring Al Pacino and Jamie Foxx.

The following year, the now defunct XFL football league made Under Armour its official uniform provider.

Originally designed for football, Under Armour is now engineered for all types of sports from golf to surfing. The company also sells an assortment of everyday apparel such as pants, jackets, and headwear – it even began designing tactical gear for the military.

The technology behind Under Armour’s diverse product assortment for men, women and youth is complex, but the program for reaping the benefits is simple, wear HeatGear when it’s hot, ColdGear when it’s cold.

The company’s website claims “Under Armour is the originator of performance apparel – gear engineered to keep athletes cool, dry and light throughout the course of a game, practice, or workout.”

Electrifying marketing campaigns, such as “Protect This House” and revolutionary athletic equipment have established Under Armour as a highly desired brand within the sports apparel market.

“I used to consider myself a Nike guy, but now, I wear almost exclusively Under Armour,” Chicago resident and Under Armour customer Eddie Milas said. “Their gear is unmatched.”

Scott Kitun/The Medillian

Scott Kitun/The Medillian

In 2012, net revenues increased 25 percent to $1.84 billion, or $1.31 diluted earnings per share, compared with $1.473 billion, or 92 cents per diluted share, in the prior year.

Increased revenues were sparked mostly by the performance of the Charged Cotton and Storm platforms, which contributed to apparel net revenues of $1.39 billion, a 23 percent rise from $1.12 billion in the prior year.

An additional boost to the bottom line was the debut of UA Spine running shoes, which spawned a 32 percent increase in footwear net revenue from $182 million a year ago to $239 million in 2012.

“We closed 2012 strongly, delivering net revenue growth of at least 20% for the eleventh consecutive quarter in the fourth quarter,” Plank said in a conference call.

Underscoring the apparel-maker’s ambitions, the company also recently said that it intends to turn its headquarters into one of the “top campuses” in the United States, and maybe even the world. In 2011, it invested $60.5 million in a 400,000 square-foot expansion to its campus, which will feature a 25,000 square-foot Under Armour store.

In many ways, the Under Armour story is akin to the early days of the Beaverton, Oregon-based apparel giant Nike.

Like Nike, Under Armour has a roster of high profile athletes across every sports platform, including multiple all-stars players such as, the NFL’s Tom Brady and Ray Lewis, baseball’s Ryan Howard, and rookie sensation Bryce Harper.

In fact, Under Armour’s chief competition when it comes to professional and collegiate equipment licensing is Nike.

The fast-growing company designed the uniforms worn by the 2010 BSC National Champion Auburn Tigers – they also design the uniforms for “Chicago’s Big Ten team”, the Northwestern Wildcats.

While Nike is the most direct competition to Under Armour’s growth, there are other capable competitors on its radar. Companies such as, Lululemon, Respect Your Universe [known as RYU] and Joe’s Jeans have emerged as significant road blocks to Under Armour’s goal of controlling the “athlete-engineered” apparel market.

The Vancouver-based Lululemon Athletica Inc. established itself by marketing to women who love yoga. By targeting these women, it was able to engineer designs and fabrics to fit the specific audience. As yoga continues to grow in popularity, so does their stock, the company gave guidance increasing its projected fourth quarter revenues from $435 million to $480 million.

Lululemon trades at over $70 per share, with strong investor interests.

RYU Inc., an athletic wear company focused on the mixed martial arts industry, developed by seeking out the athletes that would use their products most. The company founders sought elite athletes who could provide insight into what exactly they would hope for in their ideal martial arts shorts.

While RYU and Joe’s Jeans may not be nearly as dominant, they both maintain market caps of $37.77 million and $72.16 million respectively, compared to Under Armour’s gaudy market cap of $4.94 billion.

Each of the companies offers a unique product and compelling story, but they all share one thing in common – stock market success.

Under Armour, in particular, has performed extraordinarily. The stock has been reacting to increasing margins and strong top and bottom line growth in recent years. Net income, for example, went from just above $38 million in fiscal 2008 to nearly $180 million by fiscal 2012. Revenues during the same period increased from just above $725 million to almost $1.5 billion.

Over the last 5 years, its shares have climbed almost 70 percent and the stock finished up 28 percent in 2012 alone.

According to Plank in a recent press release, the company expects 2013 net revenues to grow more than 20 percent in 2013, ranging between $2.20 billion to $2.22 billion.

Despite its early success, Under Armour is not without hurdles, with a PE ratio of 41.42, compared to Nike’s PE ratio of 24.73, it cannot continue to rely just on its domestic market – 94 percent in North America.

Analysts like Matthew Boss of JP Morgan Chase warn that “a compound annual growth rate of 34% since 2005 is a double-edged sword,” because it can lead to over-cooking the stock’s price.

Last month Boss set the target price for Under Armour at $45 per share.

To justify such a high valuation it must expand globally and the best way to do that is to take market share in the largest global sports market, soccer-related goods.

Under Armour’s strategy to achieve this continued growth is through continued innovation and global expansion.

Company executives expressed, in a recent press release an intense focus on continuing to revolutionize the industry with its product lines, such as Baselayer and footwear.

They also stated a commitment to expanding further into global markets by increasing the number of retail stores abroad and by earning more endorsement contracts with globally recognized franchises.

Nike is currently estimated to own the largest global athletic market share, just edging out Adidas Group.

From 1994 through 1998, Nike introduced itself as a global brand by endorsing six major international soccer players and clubs, such as Manchester United and David Beckham. Now a $13 billion dollar industry, soccer-related equipment is the primary focus for globally expanding Under Armour.

Under Armour went about making its soccer debut, last year when it signed a 5-year contract with Tottenham Hotspurs, currently ranked fourth in the English Premier League. Additionally, it signed Hannover 96, the sixth ranked team in the German Bundesliga, and Deportivo Toluca, ten-time winner of Mexico’s La Liga.

In 2007, the company opened its first retail location at the Westfield Annapolis mall in Annapolis, Md. In the subsequent years, Under Armour specialty stores and factory outlet locations have popped up in 34 states, including its first retail location outside of North America, in Edinburgh, Scotland.

As for continued product innovation, one of the product lines that the company wishes to expand upon is footwear. More specifically, it wishes to challenge Adidas and Nike’s share in the basketball shoe category. By endorsing young NBA stars such as Milwaukee Bucks Brandon Jennings and Charlotte Bobcats Kemba Walker, Under Armour is beginning to carry its following of amateur athletes from the football fields to the basketball courts.

In keeping with its commitment to innovation, the company recently released a new basketball shoe called “UA Charge” that are unlike any basketball shoe ever seen – including ankle braces as part of the shoe’s upper.

While early reviews of the shoe by nicekicks.com called the shoe, “Ugly and disappointing”, the shoe contributed to a record fourth quarter, with footwear net revenues of $45 million, a 43% increase from $31 million in the prior year’s period.

Under Armour’s corporate culture is ambitious and aggressive as is evidenced by their rocket-like propulsion to the top of the North American athletic equipment market. However, sustaining its growth requires the company to challenge Nike on the global stage and for that, Under Armour must prove that its advantage is undeniable.

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