Under armor (NYSE: UAA) has always focused on innovative products for high-performance athletes and this approach has won over weekend warriors and professionals alike. The company has succeeded in increasing quarterly sales by at least 20% for 20 quarters in a row – that’s five years. It is more than six Years since the company missed its quarterly guidance – guidance the company has consistently revised higher.
Under Armor was like a top athlete who knows what he can do and always delivers. Therefore, his share simply destroyed the destroyed S&P 500 since IPO:
Even if even top athletes eventually decline, Under Armor is still young, on the go and probably in the best shape of its career. OK, enough of the sports metaphors. Under Armor will publish its second quarter results on July 23rd. What can investors expect? Let’s take a closer look.
Its athletes are taking the world by storm
Under Armor’s personalities keep the brand front and center, be it Jordan Spieth, who has taken the golf world by storm, won two majors in a row and wins just a few strokes less than a third this weekend; or Stephen Curry, who won the NBA’s Most Valuable Player Award while his team won the league championship; or Misty Copeland, who reached the height of professional ballet, breaking racial and social barriers in the process.
As innovative as the company’s products are, its unconventional marketing approach, as used by Copeland and supermodel Gisele Bündchen in his “I Will What I Want” campaign, has paid off enormously in establishing the company’s brand with demographic characteristics beyond the competitive athlete. In addition, Under Armor invested millions over the past year to break into the fitness app business and acquire several of the most popular fitness tracking apps in the US and Europe.
Keep an eye on capital and cash management
The $ 560 million Under Armor spent on acquiring Endomondo and MyFitnessPal last quarter resulted in a year-over-year decline in net income and the company borrowed a lot to execute the deal. Debt has increased lately, but the liquidity position has not really improved:
Don’t get me wrong: the company is not over-indebted. However, it’s worth keeping a close eye on how the company pays for future expansion. Debt isn’t necessarily bad, but the returns you get must exceed the cost of that debt.
Products drive bottom line and sales
While the investments in marketing and social media / app development are important to the company’s growth, product development and market expansion will be the main drivers. The most mature business is men’s clothing, which has been the core since the company was founded. Under Armor’s apparel business grew 21% in the most recent quarter, marking quarterly growth of over 20% for five years.
While the company does not break down apparel by subcategory, it is likely that the heavy emphasis on womenswear over the past year and beyond is driving growth. This will likely continue to be the case, but it may not be the most important category to watch out for.
Apparel still accounts for more than two-thirds of total sales, but shoes are expected to be a major growth driver in the years to come. Last year, shoe sales increased by about 40%, but only accounted for about 15% of total sales. In the last quarter, shoe sales rose (again) by 40% and accounted for 20% of total sales. Competitor Nike Still dominates the athletic footwear business, generating 60% of its sales in this category, but Under Armor is making serious strides.
While Under Armor may never be associated with shoes in the way Nike is, there is plenty of room to continue expanding its sales mix in this category. Under Armor’s footwear business is likely to be a huge growth driver this quarter and many more.
Expansion of the international presence
Sales in North America rose a little more than 20% in the most recent quarter, while sales to the rest of the world rose 74%. That’s huge, but with less than $ 100 million in revenue last quarter, it’s still a tiny slice of the company’s business. Back to the Nike comparison: More than half of this company’s sales are generated outside of North America. It’s hard to emphasize the importance of global expansion to Under Armor, and not just for the next few quarters.
It is estimated that the global middle class will grow by around 1 billion people over the next few decades. In order for Under Armor to achieve its full potential, the company must ensure that some of the athletes wear a UA logo on their clothing and shoes. Expect management to talk about this a lot on the conference call.
Run a marathon like a sprinter
Under Armor has grown so fast that it’s almost inevitable that things will slow down at some point. With this in mind, the company, under the leadership of founder CEO Kevin Plank, continues to invest heavily in product development, expand into new markets and market its products effectively and creatively. Will the inevitable disappointment come this quarter? May be. Maybe not.
Rather than worrying too much about whether the company is making earnings estimates, keep an eye on how well the company is managing its costs and generating returns as it invests in new products, market expansion, or adding and marketing a new personality. Pay attention to the company’s shoes, women’s clothing, and international sales.
This will help you understand the business better, and that will prove to be far more important over time than it can measure against Wall Street earnings expectations later this week.
This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.