Bright Prospects and Aggressive Strategies Make Under Armour Worth Watching

Under Armour (NYSE: UA  ) , Nike (NYSE: NKE  ) , and Adidas (NASDAQOTH: ADDYY  )  are fiercely competing in the global athletic-footwear and apparel market. While Nike and Adidas are the established players in this market, Under Armour has slowly but steadily been gaining a foothold and has been the best performing stock of the three this year.

Taking a look at Under Armour's strategies, investors can expect more upside in the future as the company has been expanding internationally and bolstering its presence in the U.S.

Consistent performer
Historically, Under Armour has been a consistently strong performer. The Great Recession of 2009 was the only year when annual growth was below 20%, but even then its top line grew 18%. The company's growth has been fueled by a strong pipeline of innovations and marketing initiatives.

In the third quarter of 2013, for example, new innovations like the recently introduced ColdGear Infrared technology, more products in areas such as Storm and Charged Cotton, and new designs were the main growth drivers in the apparel segment.

In its third quarter, Under Armour posted revenue gains of 26% to $723 million versus the year-ago quarter. Apparel sales grew 26% to $561 million during the quarter from $445 million in the prior-year period, making this the 16th straight quarter of at least 20% growth for the largest product category of the company (footwear constitutes only about 11% of revenue so far).

A strong growth area for Under Armour has been the women's apparel segment, which has grown from 16% of sales eight years ago to current levels of 30%. Under Armour plans to take this to $1 billion by 2016 on the back of aggressive marketing. "We want to make a statement that [Under Armour] Women has really arrived," CEO Kevin Plank said. In addition to the marketing push, Under Armour will also expand its presence to department stores to attract more customers.

Another growth driver for Under Armour is the expansion into international markets. In fiscal 2012, it drew just 6% of its revenue from the international markets. Thus, it has huge potential in the international markets. The same will be divided into four regions -- Asia, Latin America, Europe, and others. It plans to focus on countries like China, Japan, South Korea, Brazil, Mexico, Argentina, France, Germany and the U.K. and double its international business to 12% by 2016. The company has ambitious plans to hit revenue of $10 billion by 2020.

However, for attaining almost a five-fold jump in revenue by 2020, Under Armour must take away market share from Nike, Adidas, and others. Nike is the world leader in the athletic-footwear market with a share of close to 50%, and despite its size, it still manages to grow.

Fighting with the big boys
In the first quarter of fiscal 2014, Nike posted a revenue gain of 8% versus the same quarter a year ago to $7 billion. Nike must keep an eye on Under Armour as its smaller rival is aggressively pushing its marketing budget, which, as a percentage of revenue, equaled that of Nike's last year.

Nike has yet to see success in China, where the athletic-apparel and footwear market is estimated to reach $32 billion by 2017. Its frustration continues as it faces competition from brands like Li Ning and Peak. Nike's sales of footwear items were down 7%, leading to a 3% year-over-year decline in revenue from China. In contrast, even a smaller company like Skechers reported a triple-digit sales jump in China. Nike is trying to reset this trend going forward by focusing on delivering products that Chinese consumers want.

Adidas, the world's second-largest sporting-goods manufacturer, reduced its full-year guidance in September. Due to the negative impact of currency movements and softer-than-expected demand for its products, Adidas suffered.

Adidas faced unexpected short-term distribution constraints in Russia and the Commonwealth of Independent States due to the transition to a new distribution facility in Chekhov. Although Adidas hopes to correct this during the fourth quarter, this will have an impact on full-year earnings.

In addition, the sales of TaylorMade-adidas Golf declined by 16% due to weakness in demand, as per the company report. This, however, seems to be Adidas-specific, as Nike did not report any such weakness.

Bottom line
Under Armour can capitalize on Adidas' slip as it has been looking to aggressively market its products. Also, Under Armour has been looking to expand globally and has several markets on its radar, including China.

Under Armour would aim to turn Nike's weakness into its own advantage in China and take inspiration from a smaller player such as Skechers. So, Under Armour is looking promising and its annual earnings growth forecast of 21.6% for the next five years also looks good. Hence, investors on the lookout for an aggressive play in the athletic-footwear and apparel industry should definitely consider Under Armour for their portfolio.

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