Nothing But Blue Skies for This Sports-Apparel Maker

Source: Under Armour's annual report

It's not every day that you find a sports-apparel company that you can grow old with, one that will be with you from birth through old age. Baltimore-based Under Armour (NYSE: UA  ) seems to be one of those companies. You can literally get addicted to Under Armour from birth, as the company makes everything from newborn onesies to grown-up apparel and footwear. In the meantime, it's creating a brand loyalty that's tough to beat. 

That's not to say that it doesn't have to compete. Nike (NYSE: NKE  ) , long considered a possible acquirer of its smaller rival, has been around since 1968 and with $25.3 billion in fiscal 2013 revenue has a cult-like following of its own. Under Armour seems much more interested in competing than it does being taken over, and management has made some pretty bold proclamations of late (more on that later). All this talk, of course, would mean nothing if the company didn't have the numbers to back it up. In Under Armour's case, it seems to have just that.

Talk the talk, walk the walk
Under Armour had a standout first quarter, growing net revenue and diluted earnings per share across the board. The company saw an improved gross margin and lowered selling, general, and administrative expenses as a percentage of revenue. These results are illustrated in the table below.

Under Armour's Q1 Performance
  Q1 2014  Q1 2013
Net Revenue $642 mil $472 mil
Net Income $14 mil $8 mil
Diluted EPS* $0.06 $0.04
Gross Margin 46.9% 45.9%
SG&A Expenses as a % of sales 42.7% 43.1%

*Diluted EPS results take into consideration Under Armour's two-for-one stock split in April.

Under Armour raised its outlook for the year, projecting 2014 net revenue of between $2.88 billion and $2.91 billion and operating income of between $331 million and $334 million. Based on the high-end of the company's guidance, this represents net revenue and operating income growth of 25% and 26%, respectively.

Running scared?
But where investors and certainly Nike might want to take notice is in Under Armour's rising share of the footwear segment. The company grew its footwear sales by 41% to $114 million from $81 million in the year-ago period; results were fueled by running-shoe sales including its recently launched SpeedForm Apollo running shoe. CEO Kevin Plank believes that Under Armour's greatest revenue growth opportunity is in the running shoes category -- a $7 billion market in 2013 of which Nike enjoyed more than a 50% share, according to SportsOneSource analyst Matt Powell cited in The Wall Street Journal; footwear sales overall comprise only small percentage of Under Armour's total revenue currently. 

It's up against some tough competition in that area, most notably Nike, but that seems to only fire Plank up. He told CNBC's Jim Cramer last month that Under Armour could become the No. 1 brand worldwide, although Plank softened his prediction a bit by adding "it's not a zero sum game. One person doesn't have to lose for another to win." On the day of its earnings release Under Armour opened a new store in New York, its maiden location in the city, and expanded its brand into Brazil.

Meanwhile, while Under Armour is growing its brick-and-mortar presence, Nike has its sights set on e-commerce with the addition of online discount site Gilt.com CEO Michelle Peluso to its board of directors. Nike products do not appear to be sold on the Gilt site...yet. But that could be set to change. The Gilt.com association could potentially pave the way for a potential joint venture between Nike and Gilt.com; and if it came down to it could also give Nike a greater advantage over Under Armour for selling merchandise on the Gilt.com platform.

That's not to say that Under Armour is any slouch in innovation, especially in light MapMyFitness, which allows its 20 million registered users to monitor workouts online; Under Armour acquired MapMyFitness in December for $150 million.  

Share comparison
Under Armour trades at a pretty hefty one-year forward P/E ratio of about 40, approximately twice that of Nike's. So you have to pay for the growth at Under Armour but any pullback would represent a good entry point. Nike shares, meanwhile, have fallen about 6% year to date with much of the momentum stocks this year. Nike according to its annual report still considers itself a "growth company;' if you believe in its growth story now could be a good time to add shares. 

Foolish conclusion
Healthy lifestyles are only gaining traction in the U.S., and physical fitness has a lot to do with that. Both Under Armour and Nike stand to benefit from this trend for the foreseeable future. In particular, Under Armour management has growth on their minds and based on guidance is prepared to follow through on that promise. Therefore investors might want to consider not only the presence of Under Armour in their closets but also the potential in its shares. Any pullback in shares might be too good of an opportunity to overlook.

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