These Four Factors Will Drive This Retailer Forward

Under Armour (NYSE: UA  )  pleased its shareholders again when it reported significant gains on both the top line and bottom line in its third quarter earnings results. While revenue surged 26% to $723 million, its diluted earnings per share increased by 26% to $0.68 per share. In order to maintain good growth in the future, Under Armour will focus on four main business areas.

Product communications and retail presentation alignment
First is the alignment of product communications and retail presentation, which helps drive traffic into retail at key points throughout the year. Under Armour believes that integration starts with products. The company has launched new product innovations such as ColdGear Infrared, which keeps the consumer warm and retains body heat, and SpeedForm, which introduces an apparel type of fit in the footwear category.

The company's products have been promoted by young and famous athletes, including Lindsey Vonn, Jorgan Spieth and Bobby Brown. While the traditional retailers like to do 80% product and 20% storytelling, Under Armour would like to do the opposite, with storytelling the main focus of its stores.

Innovative products for premium pricing...
Second, Under Armour always tries to be at the premium corner of consumers' minds. In order to do that, it needs a powerful pricing model, driven by its continuous innovations. Kevin A. Plank, the company's founder, Chairman, and CEO, commented in the third quarter conference call:

"Our strategy is fairly simple. Wherever it is that we show up as a brand, our goal is to be best-in-class. Whether it's at our national sporting goods partners or regional ones like Scheels and Dunham's Sports. Our innovation agenda is what enables us to be the premium brand at that retail destination."

Interestingly, with the "best-in-class" approach, the company has seen its average selling price rise by around 5% in the apparel category in the third quarter. Going forward, innovation ability and pricing power will be the main sources of growth for Under Armour.

Third, the company sees a lot of potential in its youth business by connecting with youth athletes such as Jordan Spieth, Bryce Harper and Sloane Stephens. Its youth business has doubled to more than $200 million within only two years. The youth segment is expected to grow by more than 50% in 2013 and reach $500 million in revenue by 2016. 

Last but not least, shareholders' interests and management's interests are aligned because of high insider ownership. Kevin A. Plank holds 20% of the company's total outstanding shares. With nearly 21 million shares owned, he controls around 71.4% of the total voting shares. Thus, he is in full control of business performance. 

...But quite expensively valued
However, Under Armour seems quite expensively valued. At $81.10 per share, Under Armour is worth around $8.56 billion on the market. The market values the business at as much as nearly 28.2 times its EV/EBITDA, or enterprise value/earnings before interest, taxes, depreciation and amortization. Much bigger peers Adidas (NASDAQOTH: ADDYY  ) and Nike (NYSE: NKE  ) have much lower valuations. Adidas is the cheapest at only 13.3 times its EV/EBITDA, while the EBITDA multiple of Nike is 15.7.

Like Under Armour, Nike also raised average selling prices around the world, which was supported by strengthening its premium segments. The higher selling prices have helped improve its gross margin. For the fiscal year, Nike expects gross margin to increase by around 50 basis points, offset by FX headwinds and labor cost inflation. With the leading position in the market, Nike could drive future growth with product innovations and gross margin expansion. 

Adidas, global head-to-head competitor to Nike, could also bring price increases to the market driven by its innovative products. The company thinks that because of its strong innovation and high demand, consumers are ready to pay premium prices. In the first half of this year, Adidas' gross margin rose by 2.1 percentage points to 50.1%. This improvement indicated that the company was on track to meet its Route 2015 plan.  By 2015, Adidas expects to reach around 17 billion euros ($23 billion) in revenue and deliver an operating margin of around 11%.

My Foolish take
With high insider ownership, product innovations, and growing operating performance, I am quite confident that Under Armour can experience good growth in the future. However, the market valuation seems quite high at the moment. I would rather wait for a price correction to establish a position in this apparel and footwear retailer. 

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