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Ishan Majumdar
Ishan Majumdar
Articles (159)  | Author's Website |

Under Armour: Strong Growth Drivers but a Lofty Valuation

While its apps and footwear should drive top-line growth, the apparel giant's stock is expensive

Under Armour (NYSE:UA) (NYSE:UAA) had a challenging 2020 but managed to end the year on a strong note. While the company's wholesale revenues were affected during the year, it managed to showcase its ability to drive e-commerce revenues, particularly in the footwear segment.

Going forward, the company should benefit from increased demand for casual apparel wear coupled with increased consumer orientation towards a health-and-fitness lifestyle in the post-pandemic era. Its fitness app-driven growth strategy could also pan out well in the long term.

However, all these elements are well-factored into the current stock price of the company. Even with the growth drivers, is the stock worth the price?

Financial performance

In spite of a challenging macroeconomic landscape in 2020, Under Armour managed to report better-than-expected fourth-quarter results.

The company reported revenue of $1.4 billion that was above the Wall Street consensus of $1.27 billion but a drop of 2.6% on a year-on-year basis. The drop can largely be attributed to wholesale revenues dropping by 12% to $662 million on account of low in-store traffic given the Covid-19 pandemic.

However, this was partially mitigated by a solid 11% growth in direct-to-consumer revenues, which rose to $655 million. This was the result of a stellar e-commerce performance with a growth of 25% plus strength in the Asia-Pacific region.

While the company's top line declined, its bottom line improved, as adjusted earnings per share (EPS) were 12 cents, which was above the analyst consensus estimate of a 6 cents per share loss and also above the 10 cents per share reported in the corresponding quarter of 2019.

Fitness-app-driven growth

Back in 2015, Under Armour's management spent $710 million in acquiring three fitness app companies in an attempt to combine data about fitness, nutrition and sleep into an analytics platform that would give it a technological edge over the competition.

Today, that is one of the biggest drivers of the company's growth. Under Armour's MapMyFitness platform is a key growth driver as it connects to the footwear offerings of the company and provides consumers with an interesting experience through its MapMyRun (already over 1 million users) and MapMyRide offerings.

In order to streamline the app-based strategy of the company, the management executed the sale of its MyFitnessPal unit for a sum of $345 million to Francisco Partners. This not only generated good cash flows for the company but also helped the management remove a non-aligned platform.

Footwear and other growth drivers

Among other drivers, footwear sales have been key for Under Armour's success. The segments of footwear and women's sportswear have witnessed sales growth on account of strength in the company's run and train categories. Their strong alignment with consumer needs is prompting the management to invest in innovation within this segment through introducing new products.

The company's bottom line improvement is largely a function of improved yield per dollar spent on digital marketing. The management's focus has been to augment direct-to-consumer sales through digital business channels to make up for the wholesale revenue losses during the pandemic. For this purpose, Under Armour is on track with efforts like store expansion initiatives and pushing its e-commerce platform harder across different geographies. This is the reason for the 25% e-commerce growth in Q4 2020. With the online shopping trend picking up very well among consumers, Under Armour is likely to continue benefitting from e-commerce sales in 2021.

Valuation and final thoughts

As we can see in the chart above, Under Armour's stock witnessed a staggering appreciation of 54% in the past 12 months despite the Covid-19 disruptions.

The company is barely below its operating break-even with an operating margin of -0.26% and a net margin of -12.27%, which is low among athleisure companies. Its competition is with the likes of Nike (NYSE:NKE), Lululemon Athletica (NASDAQ:LULU) and VF Corporation (NYSE:VFC), who are all also have a strong digital marketing strategy and decent spending power.

While the app-based tracking approach and technology investments do give a slight edge to Under Armour, this is more than factored in its current valuation which is at an enterprise-value-to-revenue multiple of 2.24, well above the apparel and accessories industry average. It is worth highlighting that Under Armour is trading at 147.9 times forward earnings, which means that the current levels are not exactly the right time to enter.

The GuruFocus Value chart also defines the stock as significantly overvalued. While Under Armour is undoubtedly a good company with excellent future growth drivers, in my opinion, while it is certainly a "Hold" for existing shareholders, it is not at a stage where new investors would like to enter.

Disclosure: No positions.

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About the author:

Ishan Majumdar
I am a qualified Chartered Accountant with a Masters in Management (Grande Ecole) from HEC Paris. I run a proprietary boutique financial advisory firm called Baptista Research (www.baptistaresearch.com) specializing in M&A, corporate advisory, equity research and valuation of listed companies.

I have nearly a decade of experience spread across investment banks, financial advisory firms, investment funds and other corporates in many different geographies, such as France, Spain, India and others. I was a part of the LBO Financing team at BNP Paribas where I worked on deals with a combined enterprise value of over $1 billion. I have also worked in mergers and acquisitions with Credit Agricole CIB and corporate strategy with Groupe Danone SA. Over the years, I have developed a strong specialization in corporate valuations, strategy and financial analysis.

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