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Investment Overview for Under Armour (NYSE:UA)

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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 : Under Armour's Retail Apparel Revenues increased from $122 million in 2009 to around $1001 million in 2016. 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 modestly, crossing the $1.4 billion in the long run. If revenues increase only to $1.2 billion due to a slower than expected apparel market growth in the U.S., it would imply nearly 10% downside to the Trefis estimate.


• Apparel Gross Profit Margin: Under Armour's Apparel Gross Profit Margin has stayed in the region of 46%-48% historically, 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 increase its average unit prices, which has helped sustain margins. However, last year, apparel revenues were hurt on the back of a slowing apparel market. In light of this, we expect this figure to decline to 44.1% in the long run as the apparel market continues to weigh on margins. If margins increase to about 48%, there could be upside of about 10% to the Trefis price estimate.

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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, though a significant percent of sales coming from North America (about 87%). 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.

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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, as per our estimate. 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.

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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 to 151 stores in 2016, and continues to focus on e-commerce sales. The retailer also increased the average square footage of its factory stores by 9% in 2016, 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 ~16% of Under Armour's net sales (as of December 31, 2016), the company plans to increase this figure to 18% in 2017.

The company plans to expand in the key markets of Asia (China, Korea, and Japan), Europe (U.K., France, and Germany), Australia, New Zealand 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 2017, 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

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 49% in 2016, and we expect these sales to continue to grow rapidly in the future. The much publicized Curry 3 basketball shoe showed excellent sell-through rates. Footwear has now grown to represent 23% of the company’s revenues.

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 2015-2016 NBA Season have earned him the MVP Award and propelled sales of the Curry 2 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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How does my dragging the trendline on the chart impact the stock price?

1. We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
2. 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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