What's the Best Way to Profit From Athletic Retail Growth?

After Under Armour's (NYSE: UA  ) large post-earnings gains, many investors are excited. Unfortunately, some are also scared that the stock is now too expensive. Therefore, numerous investors are seeking other ways to profit from the strength of Under Armour, buying peer Nike (NYSE: NKE  ) or athletic retailers like Foot Locker (NYSE: FL  ) and Finish Line (NASDAQ: FINL  ) . So what's the best way to play the success of Under Armour right now?

Under Armour: Impressive in all facets
Under Armour finished with gains of 26% in the final two sessions of last week; these gains were created following earnings. Essentially, the company's quarterly report was one of the more impressive that we've seen in retail over the last year, and definitely the best during this earnings season.

For the fourth quarter, Under Armour announced revenue of $683 million, which was $177 million better than the consensus and good for a 35% year-over-year gain. Profits were solid as well, with an EPS of $0.59 that was $0.06 better than analysts expected.

For those looking ahead, Under Armour said that strong holiday sales have already carried over to January. As a result, guidance for 2014 was estimated at $2.86 billion, which was far better than the $2.77 billion that analysts foresaw.

Is Under Armour too expensive?
While Under Armour is apparently clicking on all cylinders, the one knock against the company is that it's too expensive for new investors.

If we look at Under Armour on a multiple basis, it trades at four times this year's estimated sales and a forward P/E ratio of 46. For comparison, peer Nike trades at 21 times this year's earnings and 2.17 times this upcoming year's estimated revenue. This means that Under Armour is about twice as expensive.

Nike is without question Under Armour's closest competitor/peer. With Nike trading at a 50% discount in the same segment of the market, many believe that it presents a better investment value.

The problem with this logic is that Nike is well saturated in emerging markets. Meanwhile, Under Armour is in the early phases of both women's apparel and emerging market growth. There is also the issue of growth, as Under Armour is projecting sales growth of 23% in 2014 while analysts for Nike expect growth of just 8%.

Under Armour might be twice as expensive as Nike, but it's also growing nearly three times faster. For most investors, that's a ratio that's clearly in Under Armour's favor.

Should you buy Under Armour retailers ahead of earnings?
While we established that Under Armour is likely presenting a better investment opportunity than peer Nike, there is still a question of whether to invest in retailers that sell Under Armour (and Nike) products.

The two most notable retailers are Foot Locker and Finish Line. Both sell Under Armour and Nike shoes and apparel.

For many, Foot Locker has been the investment of choice in this space, more than doubling the stock performance of Finish Line over a two-year span. However, it's worth noting that Finish Line is expected to grow 11% in this coming year, more than double Foot Locker's anticipated growth rate. It is also cheaper at 0.79 times sales.

Buyers in this space should be cautious, however: Under Armour and Nike are both seeing strong direct-to-consumer sales that essentially cut out the third-party retailer. This is a primary reason that margins have increased in recent quarters.

As direct-to-consumer sales rise and emerging markets produce more revenue, U.S. stores like Foot Locker and Finish Line will likely benefit less from the performance of Under Armour and Nike. Thus, Finish Line may present value in the coming year, but presents higher risks over a longer period of time.

Final thoughts
Given higher direct-to-consumer sales and the impressive growth advantage over Nike, Under Armour still looks to be the best investment option in this particular space -- even after post-earnings gains of 26%.

Furthermore, in a retail sector that has shown considerable weakness both in holiday sales and margins, Under Armour is a breath of fresh air, making it well worth the premium that it has been given.


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