Under Armour‘s (NYSE:UA) performance apparel division sports high gross margins and strong revenue growth, and we estimate apparel contributes over 75% to the company’s overall value. The apparel segment’s revenues have grown considerably backed by Under Armour’s strong brand and innovative approach. Additionally, its gross margins have also improved due to increasing share of the retail business in the segment’s revenues. The retail channel generates higher gross margins than the wholesale channel, and we believe the apparel division’s growth will be crucial in driving Under Armour’s stock to our estimated value of $53.
Increasing Share Of Retail Business
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Under Armour operates through its own network of specialty and factory stores in the retail channel. Whereas in the wholesale channel, the retailer sells its products through other independent and specialty retailers as well as sporting goods and department store chains. Under Armour has to share profits with these third party retailers, which result in lower gross margins from the wholesale channel. As an example, Jones Group (NYSE:JNY) relies heavily on the wholesale channel and its retail margins are about 1.5x the wholesale margins. 
Although the bulk of Under Armour’s revenues (72% as of 2011) come from the wholesale channel, its retail business’ contribution has increased with time. In 2009, the retail channel accounted for about 20% of overall revenues and this rose to 28% in 2011.  Under Armour was able to accomplish this by adding new specialty and factory stores as well as deliver strong growth in the e-commerce channel. Back in 2009, the retailer operated only 35 factory stores, which increased to 80 at the end of fiscal 2011. Under Armour also revamped its e-commerce site in 2010, which led to a substantial increase of 60% in direct-to-consumer revenues in fiscal 2011. 
Based on historical trends and the assumption that Under Armour will continue its expansion, we expect the retail business’ revenue contribution to reach 45% by the end of Trefis forecast period. This will help boost its gross margins which are currently at 49%.
Innovative Approach In Performance Apparel
Under Armour is focused on innovation to create better apparel for its customers. The retailer uses moisture-wicking fabrics that are engineered into many designs and styles to suit various climates. It launched Storm Cotton and Charged Cotton lines in 2011, which were two of its highest selling apparel categories. The retailer also launched ColdBlack in the first quarter of fiscal 2012, which is expected to be a major growth category going forward. These modifications have helped Under Armour register average revenue growth of about 25% over the first three quarters of fiscal 2012. 
Storm Cotton is a water-repellent finish for cotton that protects the fabric from water spills, rain and snow while maintaining the comfort of cotton.  Charged Cotton provides the same comfort as normal cotton but dries about five times faster. 
ColdBlack is an apparel finishing technology that reflects heat rays and UV rays. This helps keep even dark colored clothes relatively cooler in the sun, thus resulting in less sweat.  Moisture-Wicking fabric absorbs moisture (sweat) from the surface of the skin and passes it to the apparel’s exterior where it can evaporate. 
These technologies have helped Under Armour gain share in the U.S. sports apparel market, and we believe that the retailer will maintain this momentum in the future as well. 
Our price estimate for Under Armour stands at $53, implying a premium of about 15% to the market price.Notes:
- Jones Group’s SEC filings [↩]
- Under Armour’s SEC filings [↩] [↩] [↩]
- Under Armour Charged Cotton Storm, Under Armour’s Youtube Channel, Aug 15 2011 [↩]
- UA Charged Cotton vs. Ordinary Cotton: Literally See The Difference, Under Armour’s Youtube Channel, Mar 25 2011 [↩]
- Under Armour ColdBlack, Under Armour [↩]
- What is Moisture Wicking Fabric?, Wise GEEK [↩]
- Under Armour Gets Serious, CNN Money, Oct 26 2011 [↩]