"And, by the way, the bulk of the billions in Berkshire Hathaway has come from the better businesses. ... And most of the other people who've made a lot of money have done so in high-quality businesses." -- Charlie Munger
At Tier 1 Investments, a Motley Fool Real-Money Portfolio, I seek out and invest in elite businesses. These include companies with the most valuable brands, best management, superior products, and strongest competitive advantages. I call these businesses Tier 1 enterprises, and Under Armour (UAA) fits that description perfectly.
The brand of this generation, and the next
"The biggest, baddest brand on the planet, bar none." That's how founder and CEO Kevin Plank likes to describe his vision for what Under Armour can ultimately become. And he and his team are well on their way to reaching that goal. The company's products are well respected by athletes across the U.S. and, increasingly, around the world. Plank and his team are exceptional marketers; the company's blood-pumping ads resonate with athletes and those who aspire to become athletes. Under Armour's bold logo and brash and edgy marketing campaigns inspire movement and physical fitness, positioning the company extremely well within the healthier lifestyle megatrend.
Plank and his team relish their underdog image, especially when compared to their much larger rival Nike (NKE 1.20%), and love to operate within and promote an "us versus them" philosophy. This competitive fire has served the company well and has endeared it to hardcore athletes and their fans.
High-performance products
Under Armour's mission is to "make all athletes better," and elite athletes and teams from virtually every sport -- such as Tom Brady, Bryce Harper, Brandon Jennings, Lindsey Vonn, Michael Phelps, Natasha Hastings, Lauren Cheney, the Welsh Rugby Union, and many more -- are signing on to represent the brand. Under Armour's performance footwear, apparel, and accessories are mainstays on athletic fields, courts, gyms, and rinks everywhere. The company sells its products through wholesale channels including sporting-goods retailers such as Dick's Sporting Goods (DKS -2.27%) and increasingly through department stores such as Macy's (M -2.12%). Under Armour is also growing its direct-to-consumer business -- which now accounts for 24% of Under Armour's total sales -- via its UA.com website and by expanding its outlet store count, helping revenues in this segment increase 31% in the last quarter.
On a companywide basis, with 10 consecutive quarters of 20-plus percent top line growth and management forecasting revenue and operating income growth of 20-25% in 2013, Under Armour shows no signs of slowing down.
Protect this house
But beyond Under Armour's high-performance products, the power of its brand, and its marketing prowess, it's the company's skill at innovation that truly separates it from its peers. Plank knows that "anyone these days can go out of business as fast as the world moves today," and he acts as if he's always trying to avoid such a fate by constantly pushing Under Armour to innovate to stay ahead of the competition.
This innovate-or-die mentality permeates Under Armour's ranks and compels the company to keep moving forward by relentlessly focusing on what's next. From the first moisture-wicking shirt that Plank created in 1996 to the company's Charged Cotton apparel line and new Spine footwear technology, this emphasis on innovation has allowed Under Armour to compete and win when battling larger rivals for market share.
A passionate and visionary leader
Plank founded Under Armour in the basement of his grandmother's house in 1996. The business began as an idea he had for a shirt that would remain drier and lighter than the sweat-soaked cotton undershirts he would have to repeatedly change out of during games as a player on the University of Maryland football team. The tenacious walk-on-turned-special-teams captain eventually created a moisture-wicking prototype of what would become Under Armour's signature compression gear and began selling shirts out of the back of his truck. Over the next 15 years, Plank would go on to build Under Armour into a business with $1.7 billion in sales and a more than $5 billion market cap. Now 40, Plank still owns more than 20% of the business, helping him to amass a net worth of more than $1 billion.
But rather than ride off into the sunset, Plank remains fully involved in overseeing Under Armour's operations as CEO and chairman of the board. He maintains a laser-like focus on building Under Armour into the dominant global-performance athletic-apparel brand and instilling a humble and hungry attitude among his "teammates." He has been described as an inspiring visionary who is as passionate about his business today as when he first created it nearly two decades ago. That's exactly the type of leader I like to see at the helm of a Tier 1 enterprise.
Risks
Plank will need to remain especially vigilant over Under Armour's inventory management systems. The company's breakneck growth has in the past resulted in ballooning inventories, which could dent Under Armour's margins if the company is forced to heavily discount its merchandise in order to liquidate the excess. While Under Armour's inventory trends improved last quarter, this is an area that bears watching.
Under Armour is also not immune to global economic slowdowns. A pullback in consumer spending would hurt sales of the company's premium-priced gear as customers would probably cut back on their purchases or trade down to lower-cost competitors.
Also not to be overlooked is that Under Armour competes with Nike, the athletic apparel and footwear titan that owns one of the most highly recognized global brands and enjoys significant capital, scale, and global distribution advantages over Under Armour. In addition, Under Armour's expanded offerings for women have put it in more direct competition with lululemon athletica (LULU -0.41%), the fast-growing maker of yoga-inspired clothing. A major marketing misstep or sustained failure to innovate could tarnish Under Armour's brand to the point that its customers defect to one or both of these strong competitors.
Valuation
Under Armour is not an inexpensive stock, but great growth companies rarely are. The company is trading at 34 times analysts' earnings estimates for 2013, well above analysts' expectations for 21% annualized growth in the next five years. I typically like to buy when those two metrics are more closely aligned, but I'm willing to pay a premium to establish a position in Under Armour and its premier brand. I've long been impressed with the way Plank has led the business and built the brand, and with Under Armour still only about one-eighth the size of Nike, I believe Plank and his team can continue to profitably grow the company for many years to come. And should Plank realize his goal of closing the gap with Nike, investors who buy today will be extremely well-rewarded.
The Foolish bottom line
Under Armour is the brand of this generation -- and the next. Today, investors have the opportunity to buy shares in this outstanding founder-led growth company and profit handsomely as it fulfills its massive global potential. And so 24 hours after this article is published, I will be buying shares in the Tier 1 Real-Money Portfolio.
