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Investment Overview for Under Armour (NYSE:UA)
Below are key drivers of Under Armour's value that present opportunities for upside or downside to the current Trefis price estimate:
- Retail Apparel Revenues : Retail Apparel Revenues increased from $122 million in 2009 to around $710 million in 2014. Under Armour's focus on innovation, as well as the addition of new specialty and factory stores, helped drive the sales. Going forward we expect the figure to increase rapidly and cross $3 billion in the long run. If retail apparel revenues increase to $4 billion by the end of the Trefis forecast period, there could be a 5% upside to the Trefis estimate. On the other hand, if revenues increase only to $2.5 billion, it represents around 6% downside to the Trefis estimate.
- Apparel Gross Profit Margin: Under Armour's Apparel Gross Profit Margin has stayed in the region of 46%-48% despite the downward pressure of increased competition, the negative impact of currency fluctuations, and increased air freight costs. The company has been able to consistently introduce new products and increased average unit prices to increase margins over the last few years. We expect this figure to improve to 49% in the long run as the direct retail sales mix increases. If margins increase to 51% by the end of the Trefis forecast period, there could be a 6% upside to our price estimate for Under Armour's stock. On the other hand, if they stay at the present level, there could be a 5% downside to the Trefis price estimate.
Under Armour is a manufacturer and distributor of performance apparel, footwear, and accessories for men, women, and children. The company's products use moisture-wicking fabrics that are engineered in many designs and styles for wear in nearly every climate. The company sells its products worldwide with a significant percent of sales coming from North America. The company's distribution includes both wholesale and retail channels. Its products are worn by athletes at all levels, from youth to professional, on playing fields around the globe, as well as by consumers with active lifestyles.
The primary sources of Under Armour's value are its apparel and footwear businesses, and together they contribute around 87% of Under Armour's value. Apparel is more valuable than Footwear and Accessories businesses for the following reasons:
Market leader in performance apparel market
Under Armour is the current market leader in the performance apparel market with over 70% market share. All three apparel gearlines of the company, i.e. HEATGEAR, COLDGEAR, and COLDBLACK, are extremely popular among professional athletes as well as consumers. However, in the footwear and accessories businesses, Under Armour faces tougher competition from established players such as Nike and Adidas.
Under Armour is expanding its own stores leading to higher overall gross margins due to a shift in sales mix
Gross margins in the direct-to-consumer channel are nearly 30% higher than in the wholesale channel.
Expanding its direct-to-consumer segment is a major focus for Under Armour. The company increased its factory store count in North America by 7% in 2014 to 125 stores, and continues to focus on e-commerce sales. The retailer also increased the average square footage of its factory stores by 14% in 2014, including more product categories within its stores. As direct revenues contribute more to net sales, we expect gross margins to increase.
Focus on the international business
While international sales currently contribute only ~9% of Under Armour's net sales (as of December 31,2014), the company plans to increase this figure to 12% by 2016.
The company plans to expand in the key markets of Asia (China, Korea, and Japan), Europe (U.K., France, and Germany), Australia, and Latin America (Brazil, Mexico, Argentina, and Chile) to enhance its international business.
Under Armour’s management has always been upfront about its ambition to turn the brand from a purely American to a global one. That ambition received a significant boost late in 2013 with the opening of an Under Armour Experience store in Shanghai’s brand new mall, the Jing An Kerry Centre. This is a highly unusual venture with a unique retail concept: The Experience store features an immersive wrap-around video experience that tells Under Armour’s story. Another store, carrying a collection of Under Armour product, is connected.
Focus on the womens business
Being previously popular for its men's products, Under Armour is now focusing on women's products to enhance its revenues.
It is making efforts to elevate its brand image among women customers by altering the retail experience at its stores to suit them.
The company aims to grow the women’s business to around $1 billion by 2016, and is taking several measures to accomplish this goal. It has expanded its creative talent within the women’s business and altered its product portfolio and retail presentation to suit the tastes of female customers. Additionally, the retailer has also signed endorsement deals with female athletic and fitness icons such as Misty Copeland, Gisele Bundchen, and Lindsey Vonn.
Expansion in footwear revenues
Under Armour aims to gain market share in various shoe categories, including running and basketball. The company is launching innovative footwear technologies, enhancing its footwear distribution network, hiring new talent, and expanding marketing efforts to achieve this goal.
Footwear sales rose by 44% in 2014, and we expect these sales to continue to grow rapidly in the future. The much publicized SpeedForm Apollo running shoe showed excellent sell-through rates, while the $125 ClutchFitDrive baseball shoe also showed strong momentum. Footwear has now grown to represent 10% of the company’s net sales.
Also, previously, Under Armour only had a minor play in the lucrative basketball shoe segment, it now has a signature line for Stephen Curry. The excellent performances from Curry in the 2014-2015 NBA Season have made him a leading candidate for the MVP Award and propelled sales of the CurryOne line of shoes from Under Armour, thereby rapidly boosting footwear sales for the company. With similar efforts, the company can continue to increase its basketball shoe sales in the future.
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Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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