Are Investors Aware of Under Armour’s Under-Appreciated Growth Story?

Under Armour (NYSE: UA  ) presents investors with a compelling international growth story. The company is strategically and aggressively positioning itself to become a broadly appealing, multi-category brand that caters to men and women.

A look to the future?
Under Armour recently opened a massive 20,000 square foot "Brand House" concept in Soho, New York City. The company hinted during its first-quarter conference call on April 24 that it can operate all of its stores, including its Brand Houses, at a profit.

Under Armour stands out as many wholesalers' full-price and flagship stores (especially in New York City) aren't necessarily profit drivers, they're more for marketing exposure.

Kevin Plank, Under Armour's Chief Executive Officer, said in reference to Brand House:

Every activity that we involve ourselves in has a line of sight profitability in winning. We don't do anything that we see as being just for the brand, just for marketing, everything must have a return. And that commitment is something that I think is cultural and I think it plays to what the Under Armour brand is.

U.S. specialty retail stores have historically had a rough time duplicating their domestic success in the international market. As Under Armour plans to become a global athletic brand, owning and operating large retail spaces globally is a key component of its growth. Management disclosed that it saw 79% growth in international net revenue in the first quarter. As such, the company continues to allocate more dollars toward international.

It would not surprise many if the company were to open similar Brand House locations both domestically and internationally if the Soho model proves to be a winner in Soho. The company can look at markets where it has recently expanded, such as Brazil, in addition to already established markets across Europe and Australia.

A focus on women's apparel sales
Perhaps a surprise to some is the fact that Under Armour allocated approximately equal amounts of floor space to men's and women's apparel. As such, Under Armour recognizes the growing importance of the women's apparel market.

During Under Armour's first-quarter conference call, Kevin Plank noted that the company is not in "launch mode" when it comes to women's apparel sales. Rather, Plank said that the company is in a "perfecting" mode as it improves its dedicated product lines such as the Studio line of apparel and Armour Bra.

Sales to women represent just shy of 25% of the company's total sales. This represents a coveted and sizable addressable market, evidenced by the number of competitors that are either rushing to enter the space, or improving their assortments.

Source: Wellandgoodnyc.com

In fact, one of the lone highlights in the first-quarter results of Dick's Sporting Goods (NYSE: DKS  )  was women's apparel, with comps in the low-teens range.

However, Under Armour is ahead of the game in comparison with Dick's Sporting Goods, which admitted during its first quarter conference call that it is still in the process of allocating more of its square footage to women's apparel.

The Under Armour advantage
Dick's Sporting Goods has to undergo expensive, distracting, and time-consuming processes to improve its store layouts. Additionally, Dick's Sporting Goods is in the process of bringing in new technologies such as tablets to enhance the customer experience.

This demonstrates Under Armour's advantage over other retailers that are forced to implement radical technological and product assortment changes. By starting now, Under Armour is able to incorporate these changes with greater ease than its peers. Under Armour opened its SOHO store with mobile POS systems already equipped.

In fact, Under Armour could find it advantageous over time to pursue selling its products through its own corporate-owned full-price stores instead of relying on sales at apparel and sporting goods stores, like Dick's Sporting Goods.

By opening its own stores over the years, the company could see a higher EBIT figure than it would achieve through an equivalent amount of unit sales through a third party. Additionally, the company would be in full and complete control of the product assortment and its brand message.

For now, Under Armour chooses the department store route as it is likely to be less capital intensive. At least the company holds the option of going at it by itself. Regardless, Under Armour's growing popularity should translate into higher sales regardless of its future direction.

Bottom line
According to NPD data, the 9% sales growth of athletic apparel in 2013 noticeably outperformed the 2% sales growth of the overall apparel market in the same year. This trend is showing no signs of slowing down, and this makes Under Armour one of the best-positioned companies to capitalize on the industry's growth given its edge in innovation and technology and early stage growth engines.

Under Armour is a relatively small company with $3 billion in annual sales (compared to Nike's roughly $28 billion) but can deliver impressive growth for years to come as the company continues to gain traction in women's apparel and international growth.

Once Dick's Sporting Goods invests in improving the customer experience with the appropriate technology and store layout, the company should offer impressive growth. The company is an industry leader that can also benefit from the positive industry trends. As such, investors should consider buying strong companies when things look bleakest.

The next innovation in apparel will be huge
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