Pat McKeough recently replied to an Inner Circlemember looking for an opinion on the athletic footwear and apparel company. Its sales were up last year, but the stock’s high price is only one of several risks it faces, says Pat.
Q: Pat: What do you think of buying shares of Under Armour now that it’s down? Thanks.
A:UNDER ARMOUR INC. (symbol UA on New York; www.underarmour.com) designs and markets athletic clothing, shoes and accessories for men, women and children. It outsources its manufacturing to suppliers in China, Vietnam, Indonesia and other countries.
The company has three classes of shares. Its Class A shares trade under symbol UAA and come with one vote per share; The Class B shares are privately traded and have 10 votes per share, with a majority held by CEO and founder Kevin Plank; and the Class C shares are non-voting and trade under symbol UA.
Under Armour mainly sells its gear through general retailers, sporting goods stores, company-owned outlets and online. Clothing supplies 67% of its revenue, followed by footwear (21%) and accessories (8%). The remaining 4% is divided equally between Connected Fitness, its digital health and fitness community, and by licensing its brands to other companies.
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Most of Under Armour’s products use fabrics that wick away sweat from the skin. That makes them more comfortable and reduces their weight.
Thanks to these features, the company has deals to supply uniforms and other products to several professional sports leagues, including Major League Baseball, the National Football League and the National Basketball Association, as well as soccer teams in Europe and South America.
CEO Plank came under fire recently for positive comments he made about President Trump. They angered some of Under Armour’s sponsored athletes, including basketball player Steph Curry. The athlete tweeted his displeasure with Plank; the CEO then took out a full-page ad in the Baltimore Sun to explain his comments, and attempt to limit any potential damage to the brand.
In addition to the Trump incident, the Sports Authority bankruptcy in 2016 hurt revenue and earnings growth.
Under Armour’s revenue jumped 163.1%, from $1.8 billion in 2012 to $4.8 billion in 2016.
In 2016, footwear sales increased 50% (led by Steph Curry’s basketball line), apparel sales rose 15%, and sales of accessories gained 17%. As well, international sales (15% of total revenue) expanded 63%. North American sales (85%) rose 16%.
Overall earnings improved 100.9%, from $128.8 million in 2012 to $258.7 million in 2016; per-share earnings soared 136.7%, from $0.30 to $0.71, on fewer shares outstanding.
(Note: On April 7, 2016, the company distributed its new Class C non-voting shares to its Class A and B shareholders; investors received one Class C share for each Class A or B share they held. We have adjusted all per-share amounts for this 2-for-1 stock split.)
At the end of 2016, the company had a total of 53 Brand House stores—larger locations with a greater selection of Under Armour product. Its more reasonably priced Factory House stores finished the year with a total of 188 outlets.
Most of the new stores are outside of North America; in 2016, Under Armour opened 19 new Factory House stores and 13 Brand House locations.
As of December 31, 2016, the company’s long-term debt was $790.4 million. That’s a low 9.5% of its market cap. It also held cash of $250.5 million, or $0.56 a share.
This is a fast-changing and viciously competitive business. Under Armour faces strong competition from much larger and better-established firms, such as Nike and Adidas, that also make sweat-resistant clothing. Lululemon, a major competitor in the so-called “athleisure” wear segment of the apparel market (and, like Under Armour, a relative newcomer to the business) has also run into setbacks recently. To top it off, Under Armour trades at a very high 43 times the $0.42 a share the company is forecast to earn in 2017.
Inner Circle recommendation: We don’t recommend Under Armour.
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