In part one of my review of my recent investment decisions in October, I went through my thought process for buying shares in Cal Maine Foods. In part 2, I walk down the road of my decision to buy shares in an upstart company in the sports apparel space.
Opened position in Under Armour (Ticker: UA)
Q1: What do they sell?
Under Armour, Inc. is engaged in the development, marketing and distribution of branded performance apparel, footwear and accessories for men, women and youth. The Company's segments include North America, consisting of the United States and Canada; Europe, the Middle East and Africa (EMEA); Asia-Pacific; Latin America, and Connected Fitness. Its apparel is offered in various styles and fits to improve comfort and mobility, regulate body temperature and improve performance regardless of weather conditions. Its footwear offerings include football, baseball, lacrosse, softball and soccer cleats, running, basketball and outdoor footwear. Its accessories primarily include the sale of headwear, bags and gloves. Its accessories include HEATGEAR and COLDGEAR technologies. It offers digital fitness platform licenses and subscriptions, along with digital advertising through its MapMyFitness, MyFitnessPal, Endomondo and UA Record applications.
The company has risen to prominence by offering a different take on Nike’s empowering “Just Do It” motif. The company's brand mission has been a hit: 'to make all athletes better through passion design and the relentless pursuit of innovation.' Its vision is 'to empower athletes everywhere.'
Q2: Who do they compete with?
UA is a relative neophyte in sports apparel. They are playing with well established iconic brands such as Nike and Adidas who have their tentacles in every facet of the industry.
Q3: Who buys their products and services?
Sports apparel has become the new formal wear for the urban 21st Century lifestyle. In fact I would remove sports from their vernacular. People buy performance apparel as a comfort thing. The brand seems to have resonated with the millennial demographic and it’s endorsement lineup features Millennials that are lighting it up in the sports arena.
Q4: Will they buy their product over and over again?
They will buy over and over again as long as the styles remain fresh and as long as the brand is perceived to be the underdog. Under Armour recognizes the significant importance of finding the right athletes to help propel the brand. Nike and Jordan, for example, have set the standard across the industry. Under Armour is investing aggressively in product lines surrounding athletes Stephen Curry and Bryce Harper. In golf they have Jordan Speith. This could be a needle-mover for the company should their successes continue. Just recently they struck a deal with Major League Baseball to be the sole suppliers of baseball jerseys starting in 2020, which marks the first significant apparel contract they have signed with a major North American professional sports league
Q5: Do they make money?
Under Armour has been generating consistently high returns on invested capital, ranging from 24 to 32 percent which is significantly higher than its estimated cost of capital which tracks in the 10 percent range.
The recent growth numbers especially globally while from a small base can’t be overlooked:
- Under Armour (NYSE:UA) recorded just under $1.5B in revenue in sales in Q3 as the growth story continues.
- Wholesale revenue was up 19% during the quarter to $1.01B, while direct-to-consumer sales rose 29% to $408M.
- Apparel revenue increased 18% to $1.021B. Footwear revenue jumped 42% to $278M, jus ahead of the Curry 3 introduction. Accessories sale were up 18% to $121M.
- Global revenue increased 74% during the quarter (+80% F/X-neutral).
- Gross margin rate fell 130 bps to 47.5% as liquidations and some promotional activity factored in.
- The second quarter marked the 25th consecutive quarter it reported sales growth 20 percent or higher
- I think a lot of companies would kill to post that kind of performance.
Q6: What do they own and whom do they owe money to?
Under Armour’s balance sheet is pretty strong. In terms of liquidity, they have almost three times current assets over current liabilities. Its debt level is manageable and it has a tolerable amount of intangibles assets given its importance on projecting value through its cadre of sports athlete’s. Like all apparel companies, inventories need to be watched. Inventory turnover has creeped up in the past year to approximately 73 days from 65 days.
Q7: How risky is their business?
Apparel is a finicky business. People’s tastes towards fashion can change in milliseconds and social media is even speeding that up. Finding a proper mix of fashion that appealsto a broad market is a hard thing to do consistently and there always low points. Even the great companies like Nike have rough patches. Under Armour with its consistent growth has really defied expectations. Can they continue? They have a strong vibe but it is always susceptible to being out of date.
Q8: Is the stock cheap?
As much as UA continues to project itself as the lowly David against the Goliaths of Nike and Adidas, it isno longer a bit player. They have rightly established themselves to be as good or even better. The brand continues to grow in prominence especially outside the US.
That being said, on a relative basis, the stock has been very expensive relative to its peers. Prior to its recent demise, the stock had multiple in the 60's. It's now dropped almost in half. On a discounted cash flow basis the stock has been fairly valued to overvalued, with an intrinsic value coming in the $31-40 range. With the stock now looking at below $30, the stock appears to have some upside value.
The stock has been priced for perfection assuming that it could maintain these impressive growth rates. Any deviation and the stock has been setup to get thrashed. The reality is these growth levels are not sustainable and Wall Street doesn’t want to have any part of it. In the recent earnings call, management lowered its forecasts from 22 percent sales growth to 20 percent growth. The analysts freaked out, slamming the stock 15 percent and is now threatening to break the $30 handle. The stock has plummeted down from the high $120’s earlier last year. It is quite out of favour despite posting truly glorious performance. The growth and momentum investors are piling out of the stock now. Even if growth were to stall, the company is generating meaningful Economic Profit. With the stock trading now in the low $30’s I’m thinking this may be a nice entry point to establish a small position and build up. There is probably more hurt to come with the stock price, but I think I’ll sleep better at these prices.