A Growth Company Unfazed By Macro Trends

The next time you visit the mall, pay specific attention to the brands kids and teens are wearing. You might notice that many of them are wearing Under Armour (NYSE: UA  ) . If the kids are wearing it now, Under Armour has an opportunity to keep those consumers loyal for the remainder of their lives. Under Armour has a long way to go to catch Nike (NYSE: NKE  ) , but Nike has the target on its back.

Strong growth

I recently did a study on the 30 Dow components, and 40% of those companies saw declining revenue in their latest fiscal year. The Dow has moved higher for various reasons, but that's a story for another time. The point here is that while many Dow-component companies are suffering revenue declines, Under Armour is delivering consistent top-line gains. That's impressive.

Under Armour's net revenue has shown gains north of 20% for 13 consecutive quarters. In the most recent quarter (Q2), net revenue increased 23% to $455 million. For a better idea of the big picture, Under Armour's 2012 revenue came in at $1.8 billion, versus $725 million in 2008.

The Under Armour brand is constantly growing, and demand remains high. Under Armour expects FY 2013 revenue to grow between 22% and 23%, coming in at $2.23-$2.25 billion. 

Additionally, Under Armour isn't sitting back and relying on momentum alone. It's also a consistent innovator, which keeps the pipeline busy and full of potential.

Recent innovations

Part of Under Armour's growth strategy is international expansion, but innovation is just as important because it heightens demand in established markets. A few of the company's most recent innovations:

  • UA COLDGEAR: Apparel that allows athletes to stay warm for longer periods of time.
  • UA HEATGEAR: Apparel that regulates body temperature and enhances workouts.
  • UA Speedform: Revolutionary running shoe with seamless heel cup.
  • UA Spine Venom: Running shoe with excess foam removed, which rids extra weight without sacrificing comfort.

(Sources: 10-Q/UnderArmour.com) 

Speaking of Nike

Under Armour has a market cap of $7.73 billion, making it a much smaller company than Nike, with a market cap of $56.52 billion. While Under Armour has stolen some market share over the years, Nike always fights back strongly  Like Under Armour, Nike constantly innovates.

Nike's flyknit running shoe Free Hyperfeel gets rid of extra padding, allowing the runner's foot to feel the ground. Nike Pro Turbospeed is the lightest and fastest track uniform Nike has ever designed. It's clearly evident that Under Armour and Nike are battling each other with similar products. Under Armour has more growth potential domestically, while Nike has more growth potential internationally, thanks to its immense marketing power.

A riskier alternative 

Many investors who venture into the apparel space often find themselves also considering Lululemon (NASDAQ: LULU  ) as an investment option. Here's why:

UA Chart

UA data by YCharts

Many investors tend to buy a stock after a big run because they're upset they missed it, and they hope that run will continue. While this strategy actually works sometimes, it's certainly not a guarantee for Lululemon. Actually, it would be a big risk.

Unlike Under Armour and Nike, Lululemon has been the center of attention for all the wrong reasons. These reasons include a $67 million recall of Luon yoga pants, the announcement that CEO Christine Day will be leaving, and posting a fake CEO ad on its website and Facebook page. While Lululemon focuses on building personal relationships with its customers, which is a big positive for potential future sales, this company's culture seems to be too outlandish for an investor to feel comfortable.

Conclusion

Under Armour is a very well-run company with a brand that's consistently gaining exposure. I have been bullish on Under Armour since 2005, but I recently wrote an article stating that my only concern was valuation. Currently, Under Armour trades at 59 times earnings, which still makes me a little uneasy. In a normal economic environment the company's growth would more than justify this multiple, but considering the current economic environment, there is at least a little trepidation.

On the other hand, if you're looking for a long-term investment in a quality company with strong growth potential, then you're not going to find many better options. In order to protect your capital, consider scaling your way into a position, saving the majority of your capital to purchase more shares if the stock suffers. If you want a little less growth potential but more safety, then Nike is likely a better option for you. 

The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.


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