Stocks Meet Sports: Under Armour
- Posted by Leigh Drogen
- on January 19th, 2011
This post was origionaly published on 1/17/11 at The Post Game. It is the first post in my bi-weekly column which looks at the connection between stocks and sports.
Update 2/4/11: The chart says it all, Under Armour firing on all cylinders, the Lululemon guidance raise a few weeks ago was the tell, specialty retail product industry is smoking hot right now.
Update 1/27/11: Under Armour reported earnings this morning and crushed the estimates. They came in at an EPS of .44 vs the estimate of .37. They also substantially raised revenue and income guidance for 2011. Earnings increased 47% from the same quarter last year.
They also announced the spring release of a “charged cotton” t-shirt line. The stock is up almost 7% this morning on big volume and clearing an important technical level.
In essence, this company is on fire, no reason to believe that will change any time soon. The same can be said for the stock.
Most of us fans saw the BCS Championship Game as Auburn vs. Oregon or Cam Newton vs. LaMichael James. But as a stock trader, I couldn’t help but see it as a battle of great brands: Under Armour (Auburn’s outfitter) vs. Nike (Oregon’s). On the field, Auburn won. And on TV, Under Armour won, getting about $5.3 million in ad exposure from the championship broadcast. (Nike got $2 million less, according to CNBC’s Darren Rovell.) And what about in the stock market? Let’s take a look.
Under Armour has become a necessary piece of equipment for me as a hockey player. I honestly couldn’t play without it at this point. And every year instead of some awful sweater from The Gap they know I’ll never wear, my relatives send me Under Armour. I’m outfitted from head to toe in the stuff when I play, the socks, compression shorts and long-sleeve compression shirt.
Under Armour was able to carve out a great niche in the athletic wear industry by coming to market with a distinct product; their main innovation was in the synthetic fabrics used in the compression moisture wick shirts and shorts they marketed to athletes. I remember as a kid wearing loose fitting t-shirts and boxer-briefs made from cotton under my hockey equipment. It was uncomfortable, and by the end of the first period I was soaking wet. Luckily today my equipment keeps me drier and is significantly lighter than it used to be.
Although it was founded in 1996, the company’s initial growth phase took place between 2002 and ‘07. It did a magnificent job at focusing on a limited line of products and building brand awareness. It became a staple in every athlete’s equipment bag and marvelously marketed itself by sponsoring top athletes in every major sport. It had marketed itself so well in fact, that “Under Armour” today is used as a generic term for all athletic under garment equipment of the kind, the same way we use “Kleenex” for tissues and “Xerox” for photo copy.
But like every other high growth apparel company in a new market, Under Armour ran into hurdles. Nike, Reebok, and a host of other companies came to market in the latter half of the decade with their own lines of very similar equipment. Under Armour would have to change tactics in order to continue its steady sales growth. The company was at a major crossroads, and then the global economic collapse took place.
Its stock price plummeted. Sales growth took a nose dive in ’08, due to consumers’ unwillingness to spend on anything other than the essentials. When growth slows for the first time in a developing business like Under Armour, holders of the stock playing the momentum trade exit quickly. High stock prices compared to
earnings are a sign that the market is uncertain as to just how fast a company can grow after several excellent
quarters. But when expectations for that growth aren’t met, the stock will often trade down quickly. Under Armour dropped from a high of $73 in ‘07 to a low of $11 in early ‘09. Its EPS (Earnings Per Share) for ‘07 came in at $1.05 while its EPS for ‘09 was $.92. As you can see, huge stock value contraction took place while the fundamentals of the company remained strong.
The company kept going, however, expanding into footwear, casual wear, and accessories. And it has been extremely successful. Under Armour’s brand is strong, and by positioning themselves at the top end of the market, they’ve maintained the athlete’s trust in the quality of their gear. Take it from someone who hates to blow money on clothing: I’m willing to spend a few extra bucks to know my athletic equipment is top
Over the past year and a half, Under Armour has been able to regain its pace of growth. Its revenue and earnings are both accelerating at a nice clip, and institutional participation in the stock has been significant. Its earnings and sales multiples have both expanded again as well, as analysts have failed to account for the success of its new product lines.
Now let’s take a look at the UA stock chart.
It shows great strength, trading above the 50- and 200-day moving averages, which are both moving higher. The apparel industry has shown great relative strength in comparison to the overall market, and Under Armour has led the way. The current bullish pennant-shaped pattern is a positive sign after a very strong run the past few quarters. If it holds, the pattern will signify further buying by intermediate and long term holders of the stock. And if the pennant breaks out to the positive on high volume, it’s a sign of more good things to come.
I don’t believe Wall Street analysts have a good grasp on just how strong the Under Armour brand is, and how successful they will be at moving into other lines. As always for an apparel company at this stage of its growth, it will be important that Under Armour does not stray too far too fast from its core brand. Overextending itself and its product line is a large risk as compression undergarments, UA’s bread and butter, become a smaller piece of sales and the overall story. The company needs to focus on constantly making the connection between its core and their future with the consumer.
The company is expected to report earnings on Jan. 28, which could be the catalyst for the next leg up in this stock. This is the phase at which a small company with a highly specialized product can become a large multinational apparel company with an expansive product line. And for those who don’t remember, that’s exactly what Nike did by expanding from shoes to everything from sunglasses to golf clubs.
Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see the Disclaimer page for a full disclaimer.
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Leigh Drogen is the founder and chief investment officer of Surfview Capital, LLC, a New York based investment management firm employing an intermediate term long/short momentum strategy. More »
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