Under Armour’s International Growth Looks Promising

Under Armour Inc. (UA) won an Olympic gold. The company ran an ad featuring US Olympic gold medalist Michael Phelps rigorous training outside the swimming pool. It was a unanimous victory for UA’s “Rule Yourself” campaign. According to an Adweek report, the ad is one of the most shared video in social media garnering million views through various platforms.

The strategy is to boost its brand in the international scene.
There is a strong opportunity for the company in the international market, where its main competitor Nike (NKE) generates more than 50% of its revenues outside of the United States. During the second quarter 2016, international net revenues amounted to $299 million, or a 61% year-on-year growth and represented 15% of the total revenues during the period.

The company plans to pursue an aggressive international expansion and targets to have operations in over 40 countries by 2018.
Under Armour’s International Growth Looks Promising
Image by Wokandapix / Pixabay
Most of these expansion plans will be through partnership with distributors as well as the opening of its own retail stores. Reportedly, it has gained ground in China, but would also target key markets in Europe, the Middle East and South Africa as it has added 250 shop-in-shops on these locations. While it seems that reaching the $30 billion international revenues of Nike appears a long shot, there is no doubt that UA can gain operational scale with its recent moves globally.

Steady Growth, But Market Unimpressed…

Over the last 5 years, revenues have steadily grown from $1.47 billion in 2011 to $3.96 billion in 2015. This is a 29% growth over the last 5 years. As a result, the company managed to increase its net profitability from $97 million in 2011 to $232 million. Currently, UA’s share price trades 25% lower than its 52-week high of $54 per share.

The main reason is actually the relatively low net profit margins of 5.24%, compared to Nike’s net profit margins of 9%. The dent in net profit margins is attributed to the higher discount sales, which led to a decline in gross profitability as well as hike in operating expenses resulting from its higher pre-operating costs from expansions.

Nonetheless, management indicated that there is a huge opportunity for the company to improve their operating efficiencies and its product flow. These efforts will basically address the issue of liquidating unsold inventory and limiting the growth in operating expenses through cost effective measures. Consequently, this will improve their net profit margins over time and allow the market to re-rate the stock.

These concerns have overshadowed market’s appreciation on the long-term attractiveness in UA’s international operations. Investors looking at mere P/E ratios on UA would definitely shun away at the 43 times earnings multiple, relative to Nike’s P/E ratio of 26 times.

It should be noted that historically, UA shares have traded at these levels. Additionally, investors should look at considering the company turning positive free cash flow with overhauling its cost structure as well as enhancing its product flow through increase brand recognition globally.
Published on Sep 16, 2016
By Chris MacDonald

Copyrighted 2016. Content published with author's permission.

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