Markman Capital Insight

Spotlight Stock: Under Armour

The swift development of a category of clothing known by the portmanteau "athleisure" has shocked and changed youth retailing in the past few years. Working out is cool again, and wearing your workout clothes makes a personal statement about your lifestyle. This movement has led to the rise of companies like lululemon (LULU), which have had tremendous success blending athletic wear and fashion.

A less known beneficiary of this trend is Under Armour. The company is a perennial out-performer, with a share price that has pole-vaulted over 900% higher in the past five years from under $10 to $99 today. With the stock now at all-time highs, Under Armour is valued at around $22 billion, or about a fourth the size of industry titan Nike (NKE).

Under Armour has kept its quarterly growth rate above 20% since 2011. This is a testament to the quality of the management team, and Under Armour’s consistent quest to build revenue and shareholder value through the development and swift introduction of new products and the savvy sponsorship of emerging athlete superstars like professional golf phenom Jordan Spieth.

In its second quarter report, the company reported year over year growth of 29%. In addition to these strong results, management upped the full year 2015 revenue guidance to $3.84 billion and updated operating income guidance to a range of $405-$408 million.

Using these metrics, Under Armour is being valued at 54 times 2015 operating income, and 5.7 times 2015 revenue. These multiples are very rich, but a lot of the valuation comes from investors' appreciation for Under Armour’s leadership in athleisure clothing.

The company has blended a unique mix of quality, functionality, and style that gives it the perfect entry into wearable technology. The commoditization of small chips, and increasing push towards tracking fitness activity, has opened doors for this fresh, smart and high-margin new category. Tops like the one below, with fitness trackers built into the fabric, will soon become common as their connection to the skin is more natural and ability to pick up heart rate and sweat clues more visceral.

Connected Fitness will be Under Armour’s next push to enhance its ecosystem and value proposition to consumers. Through the first quarter of this year, the company reported that over 140 million unique registered users were on its platform, and that 100,000 athletes were being added each day. Not only will this push into wearable technology improve the underlying apparel and footwear businesses, but it also opens doors into digital revenue opportunities. In the company’s February Connected Fitness presentation, Under Armour specifically lists Advertising, Subscriptions and New Platforms as additional sales opportunities from the Connected Fitness push.

In conclusion, there are two major market tailwinds at Under Armour’s back: Athleisure, which is making fitness apparel a bigger part of consumers overall wardrobes, and wearable technology, which will drive a deeper connection to products, and opens up for digital revenue that were previously unavailable to run-of-the-mill athletic clothing suppliers of the past. Keep holding.

-- Jon D. Markman


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