After Amazing Earnings, Under Armour Still Looks Expensive

On Friday, Jan. 31, shares of Under Armour (NYSE: UA  ) rose more than 3% after the company reported fourth-quarter results that left analyst estimates in the dust. In response to the news, the company's shares hit a new 52-week high in intraday trading before closing at $108.11. Now, however, with a P/E ratio of 72, has Under Armour finally hit an inflection point, or does the company still have room to run?

Under Armour blew past Mr. Market's forecasts
For the quarter, management reported that revenue came in at $682.8 million, 35% higher than the year-ago $505.9 million and above the $619.9 million that was expected of it. According to its earnings release, the primary driver behind the company's top-line growth was a nearly 37% rise in North American sales. Internationally, however, the business only grew by 12% over this time frame. 

Under Armour's accessories category was, by far, the best performer throughout the quarter. Although sales in this segment comprised only 10% of the company's consolidated revenue, results represented a nice 52% jump in business compared to the same quarter a year earlier.

During the quarter, the company also experienced a 26% rise in earnings per share, from $0.47 to $0.59. This represents a beat of 11% when pitted against the $0.53 that Mr. Market hoped to see. For the most part, this unexpected rise in earnings came from higher revenue but was offset by higher expenses. Under Armour's cost of goods sold fell to 48.7% of sales for the quarter compared to the 49.7% it saw in the same quarter a year earlier. While this is generally good, it was more than offset by a jump in selling, general, and administrative expenses, which rose from 34.2% of sales to 36.9%.

But how does the big picture look for Under Armour?
While one quarter can tell a little about a company, the bigger picture can only be seen by looking at that company's longer-term performance. Examining Under Armour's past four years, for instance, would show that this isn't the first time that management has delivered strong results to shareholders. Over this period, revenue at the company rose an impressive 114% to $1.8 billion. This growth far surpasses that of larger rival Gap (NYSE: GPS  ) but falls short of lululemon athletica's (NASDAQ: LULU  ) .

Between 2009 and 2012, Gap experienced reasonable revenue growth of 10% to $15.7 billion. Given that the company is significantly larger than Under Armour, it shouldn't come as much of a surprise that it is growing more slowly. Lululemon, however, puts both Gap and Under Armour to shame. During this period, the company saw its revenue explode by 203% to $1.4 billion.

But how do these companies fare compared to Under Armour in terms of profitability? You see, over the past four years, Under Armour's net income rose 175% to $128.8 million. By any measure, that's an impressive growth rate that not just any company can stand up to.

Gap, for instance, is one such company. Between 2009 and 2012, the retailer saw its net income rise only 3% to $1.1 billion. While its bottom line is far larger than Under Armour's, the slower revenue growth combined with rising costs have resulted in Gap's net income growing at a snail's pace.

Lululemon, on the other hand, significantly outperformed Under Armour in net income performance. Over the same period as Under Armour and Gap, Lululemon's net income jumped a jaw-dropping 364% to $270.6 million. Just as in the case of Under Armour, Lululemon experienced this rise in profitability as a result of rising sales and falling costs.

This second point is illustrated using the company's cost of goods sold and selling, general, and administrative expenses. As a percent of sales, Lululemon's cost of goods sold fell from 50.7% to 44.3% in this period while its SG&A expenses declined from 30.1% to 28.2%.

Foolish takeaway
Currently, Under Armour is still growing rapidly and looks like it will continue this trend for the foreseeable future. With this alone, shareholders should be relatively comfortable with the stock but should keep an eye on its P/E ratio. For those not comfortable with the cost of Under Armour's shares, an alternative approach would be to buy shares of Gap or Lululemon. Gap's P/E of nearly 14 is markedly lower than Under Armour's, and Lululemon's P/E of 24 isn't bad either.

As such, either one of these companies could probably set up the Foolish investor for attractive prospects, and at a significant discount to shares of Under Armour.

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