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.

Crab cakes and football

Hold your criticism Big Ten fans. This week when Big Ten Commissioner Jim Delany announced the addition of Rutgers and Maryland to the conference, there was an immediate backlash across the Twitter universe.

The general sentiment being that while conferences such as the SEC are adding championship caliber teams like Texas A&M to their conference roster, the Big Ten doesn’t seem to be adding much with their recent additions.

The fact is, most Big Ten fans were hoping for a Notre Dame-like team, if any, was to be added to the conference.

There is no question that the Big Ten Conference is feeling a pinch as the top tier teams are defecting for the SEC. Delany is doing everything he can to avoid falling into the same traps that the Big East Conference did.

That means strategically selecting teams to bolster the conference roster and not just grabbing defectors on the cheap, as the Big East has done.

Delany is very attuned to the conference building process. After having seen the Big East crumble, despite having numerous championship level basketball teams and great mid-level talent across the conference, it wasn’t enough.

To be a competitive college conference in the future, you must have strong football teams with at least two powerhouse teams, like Southern Cal and Oregon or Alabama and Louisiana State.

Undoubtedly, the Big Ten will always hang its collective hat on the University of Michigan, one of the most profitable athletic programs in the country.

Ohio State, Wisconsin and Michigan State also contribute a lot to the conference but more is needed if the conference wants to continue to compete for titles and media dollars.

Conference commissioner Delany is not going to admit that the major contributing factor to adding Rutgers is the East Coast media shares. Obviously, football and basketball championships aren’t exactly selling points for Rutgers.

College fans do not want to hear about media shares when it comes to conference expansion. In fact, it is probably the worst part of college sports, the inevitable eclipse of sport and business.

That said, I believe the Big Ten may have acquired the next gem of college sports, in Maryland.

Say what? Maryland? Yes. Maryland.

Maryland developed NCAA championship credibility in basketball under coach Gary Williams and as the Wedding Crashers movie-line goes, “Crab cakes and football. That’s what Maryland does.”

Over the next decade, I believe that we will be talking about Maryland football as a perennial power.

How? Think Oregon. Oregon since the mid 1990’s has become a true football powerhouse in addition to five Pac 8/10/12 Conference titles in basketball.

Ever since Oregon alumnus and Nike founder, Phil Knight, established Nike as the premier sports brand and began to funnel millions of dollars into Oregon athletics with the Knight Labs, Oregon has been a recruiters dream.

Between the state-of-the-art facilities and Nike’s brand identity, Oregon has been able to recruit blue chip talent that has translated into record success.

When I see Maryland, I see a budding Oregon. Maryland is the alma mater of Under Armour founder, Kevin Plank.

According to Forbes as of August 2012, Under Armour is a $10 billion corporation. They actually have gained on Nike in the North American market over the past four years.

Now, comparatively, Nike is a $50 billion corporation. However, Nike earns two-thirds of its revenue overseas, whereas Under Armour earns 95-percent of its revenue in the United States and Canada.

This might not matter to sports fans, but to those in the know, this is a huge deal. Market analysts at Market Watch, are predicting that if Under Armour can increase its global market-share by just 15-percent, you could be looking at an honest competition for Nike.

For the Big Ten, this means big games and big money. There is no secret that Nike and Oregon capitalize on the brand’s recognition when it comes to recruiting.

Under Armour is rapidly becoming the biggest equipment brand in college athletics and professional football. Under Armour has spent millions of dollars establishing athletic camps around North America, including hosting the premier high school football preseason camps.

Under Armour founder Kevin Plank currently sits on the Board of Trustees at the University of Maryland and has already committed millions of dollars to their business and athletic funds.

Between the improved facilities and brand identity, Under Armour is setting Maryland up for similar success to that of Oregon.

And, if things play out the way many market analysts predict, I think the future of the Big Ten Conference rests on Michigan and Maryland.