Will Under Armour Eat Nike’s Lunch?

Although Nike (NKE) has fortified its position as the leading footwear and athletic apparel manufacturer, if there’s any company that can trouble it in the long run, it has got to be Under Armour (UA). Under Armour has been showing double-digit sales and earnings growth for many years and the company’s growth story is still intact.

In the most recent quarter, the company’s sales surged 30 percent. Furthermore, Under Armour observed robust growth in international markets, as the company’s international sales surged 56 percent year over year.
Under Armour clearly has many large markets worldwide to expand into, which is why I think the company’s double-digit growth is sustainable for at least two years, which in turn justifies its rich valuation.

The company is on its way to break $5 billion in yearly revenue this year. On the other hand, Nike is a much greater firm as compared to Under Armour, as Nike generated overall revenue of approximately $32 billion, almost seven times more than Under Armour. Under Armour cannot be compared to Nike yet, but I won’t bet against the company slowly inching towards Nike’s numbers.

Under Armour does not necessarily need to snatch business from Nike, as the worldwide footwear and athletic apparel market is big enough, and will help both the companies to reap huge profit. Apart from these, in recent years, Under Armour has made a massive investment in its digital strategy.

Recently, Under Armour introduced a new application named UA Shop which permits users of MapMyRun, MyFitnessPal, and UA Record to synchronize their prevailing accounts in one unified Under Armour account. This new app has been built on the company’s Connected Fitness platform, as it connects to its various other activity tracking apps to gather data from more than 170 million existing users to create a genuinely personalized shopping experience.

On the other hand, Under Armour’s continuous inventory growth can create a problem for the company. The company’s first quarter accounts for the third successive quarter in which inventory grew faster than top-line. This is a problem for retailers because excess inventory results in deeper discounts to clear shelves for newer products. However, the company’s management is taking various steps to enhance service levels.

Under Armour also publicized that it is working with SAP to provide an integrated enterprise resource planning solution across its entire business lines. This will certainly help Under Armour to enhance its supply chain. Under Armour is clearly more technology-oriented than Nike, an aspect which will help differentiate the brands years down the line.

All things considered, Under Armour is worth the premium and the stock is a definite buy right now. Long term investors, despite its valuation, can consider buying the stock as it will likely continue growing at double-digit speed for several more years.
Published on Jun 20, 2016
By Akshansh Gandhi

Copyrighted 2020. Content published with author's permission.

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